Why We Chose a Brokerage Account Over a 529 or UTMA Plan

• We considered a 529 or UTMA plan to save money for our daughters future.
• However, we are not sure if they will pursue higher education, so we did not use a 529 plan.
• We also didn’t think a UTMA was the right fit, so we chose a brokerage account instead.
• Compare the best savings accounts with Fiona.

When my husband and I started saving for our two daughters, we knew we wanted the money invested in the stock market. We also knew that we wanted to be able to provide them with funds, whether they choose to go to university, for example to buy a house or start a business.

When we started looking at the options, we realized that some of the more popular options, such as a 529 plan and the UTMA (Uniform Transfers to Minors Act), weren’t necessarily the best choices for us.

Why We Didn’t Choose a 529 Plan to Save for College

Although a 529 plan is an extremely popular choice for caregivers looking to save for a child’s college education, the funds can only be used for educational expenses. If the child chooses not to attend college, the funds can be passed on to another child or family member, or to the child’s own children thereafter.

Investing in a 529 plan also allows for tax-deferred savings and tax-free withdrawals if the funds are used for eligible educational expenses. If the child chooses not to attend college and the funds are not transferred to another family member, the account may be closed and the funds withdrawn, but an additional 10% tax and fee will be applied. billed.

While we expect there’s a good chance our daughters will be in college, it’s hard to say for sure. The education landscape is changing rapidly and we know that the next 15 years will bring even more changes. While I have no doubt that further education and training will be paramount, I am not certain that our children will follow the same four-year college journey as us, which is why we have decided not to start a 529 for the moment.

Why we didn’t choose a UTMA to save for the future

We also considered opening a UTMA account, which would allow us to invest funds and avoid tax consequences on donations.

However, funds in a UTMA account are automatically transferred to the minor when they reach the legal age, which is 21 where we live. While 21 seems like an old enough age to hand over the funds, we also know there’s a chance our child won’t be responsible enough to handle a financial windfall. Of course, we hope for the best, but we also know that life happens, and we don’t want the added pressure or poor decision-making that might come with a substantial monetary donation.

If we want to transfer the shares to a UTMA account later, we can do so as our children approach legal age and we feel they have a good plan for the funds.

Why We Chose A Brokerage Account To Save Money For Our Kids

Investing our children’s money in a brokerage account right now allows us to diversify investments as we see fit, including changing risk tolerance as they get older and the purpose of the funds becomes clearer.

“The No. 1 determining factor when it comes to choosing an investment is the time horizon,” says Taylor Sohns, CFP and co-founder of LifeGoal Investments and Home Down Payment Fund (HOM). “Parents of younger children have the ability to take more risks, while those of older children need to be more concerned about protecting against risk of loss.”

For most people, a 529 or UTMA plan makes perfect sense. And while we loved the tax benefits of both types of accounts, we knew neither was right for us right now. Between the funds usage limits for a 529 and the young age at which funds are automatically transferred to the beneficiary in a UTMA, we decided to take a different route.

Since most of our investments are with Fidelity, we opened another brokerage account and earmarked it for our daughter’s future, knowing that we can change the vehicle for those funds along the way if needed. Whether it’s to further their education, buy real estate or start a business, the funds will be there for them.