My husband was talking to our investment accounts manager about our situation. We have a three year old autistic child with substantial support needs, who is showing tremendous academic aptitude yet has severely limited social skills and other adaptive skills limitations. While he may one day attend college and do very well, there’s also a real possibility he will not attend college and/or will need our support well into adulthood. As my husband put it, “This kid could either work for NASA or never be able to support himself, could go either way.”
So we’re trying to figure out how to save money for his possible school expenses which wouldn’t lock us into anything if he doesn’t end up attending college. A 529 would be a possibility but we would take a 10% loss if the funds aren’t used for schooling.
The accounts manager recommended an UTMA, or Uniform Transfer to Minors Act account. But I admit the idea of giving a bunch of money to an 18 year old kid is somewhat terrifying. The money would become his and he could spend it on anything. Nothing in my son’s personality currently indicates he’d be bad with money (on the contrary, we may have a little accountant on our hands) but he’s, you know, three.
I thought if necessary we could always apply for Power of Attorney or something if he is really too disabled to manage the funds on his own. Right now we are optimistic of his progress though, so I’m hoping that’s a less likely worst case scenario.
Does anyone have any experience with this type of account? Are there other options we’re not aware of?
Since you say your child has substantial special needs, you may want to look into setting up a special needs trust, and other legal work re: estate planning with an eye toward special needs. Short intro to special needs planning
One difference is that the gains made in the UTMA will be taxed but the 529 won’t. The growth in the UTMA is taxed at the child’s rate rather than yours, so there is some benefit to putting money there rather than keeping it in your account. You’d have to run the numbers to see how the 10% penalty from the 529 compares to the regular tax on the UTMA.
The 529 can be used for a variety of educational costs. If he doesn’t go to traditional college, it can be used for trade or community colleges. It can also be used for private K-12 tuition. Even if you’re planning on public school, you may want to do private school for some of the years.
You can use a Roth or IRA for college expenses without penalty. If you work for a company that offers 401k versions of them, they have higher limits than the personal versions. It might be better to put extra money into retirement accounts until you find out if he actually likes school or not. Even if he enjoys learning, he might just like learning on his own and not enjoy traditional education.
Assuming a special needs trust isn’t a better fit, I’d still lean towards a 529. They’re incredibly flexible these days on eligible expenses, and unused balances can now be transferred into a Roth IRA for the beneficiary (the catches being that there is a $35,000 limit, and your son would also need to earn $35k in wages).
You should acquaint yourself with ALL the eligible 529 expenses, as well as the tax benefits your state offers for participating. Here in Indiana, they offer a 20% tax credit (up to $1500 total) for annual contributions.