Savings options for children
Hi Terry,
I have three children, ages 6-10. Shortly after they were born, I opened up a Schwab One custodial (until age 21) brokerage account for each of them, and have been investing the money they receive from birthdays, Christmases, and special occasions in a Schwab Target 2055 fund ever since. Their accounts have done well and they have enjoyed watching their money grow. I have used these accounts to teach them about the time value of money, the importance of saving, and the benefits of starting early. However, I am worried that when they apply for college, they will be penalized for saving instead of spending and expected to use this money for school. Is there a way to ensure that the money they’ve worked so hard to save and invest will be there for them to spend as they choose?
Thanks in advance for your help!
Terry Says
For sure, the money in a custodial account will weigh very heavily against the family in the FAFSA formula used for financial aid for college. Now is the time to make the change.
You’ll want to roll the money from the custodial accounts into a CUSTODIAL 529 plan.
And a custodial 529 plan has some restrictions, as it can only be used for that one child who will eventually become the owner of the plan at the age of majority in your state. It cannot be used for other children in the family if that named child gets a scholarship, for example.
Frankly. I’m not sure anyone is going to look back at the source of the funds — so perhaps you might try moving the money into a standard 529 plan, one for each child. At least that money can be transferred among siblings.
And, one more idea, since I have no idea what the rules will be in 15 years when they start thinking about college. These accounts have done well because the market is at all-time highs! Schwab’s target fund is invested primarily in stocks since the date is so far ahead. Maybe move that money for college — then open an account at Stockpile.com and let each child pick a stock on his/her birthday — perhaps $100 each year, since they allow partial share purchases. It won’t be so much money as to impact financial aid, and it will teach them about the stock market.
About the 529 plans, read more about how a custodial plan works at www.SavingforCollege.com.
