tax consequences

College Savings Ideas When There’s More Than One Kiddo

photo shows graduation caps in the air against a blue sky

Some things that seem complicated can be made simple. Other things, like college funding accounts for descendants, may get more complicated over time when more than one child is involved.

Consider how disparities may develop across account balances:

  • Imagine that, upon their birth, the first child receives a one-time deposit of $1,000; the second-born receives $100 monthly from birth to age 18; the third on the way is set to receive the same deal as either of the first two. However, this third child will necessarily have less purchasing power from the same amount in contributions. Why? In the years that have passed, inflation will have done its work.
  • One-time deposits may go in at a more advantageous time to invest for one child than another.
  • Equity among children will remain a shifting target as asset values and college costs change over time.

… And all this is before we even consider the differences in children’s needs.

One approach to simplify this reality is to think of college funding as a consolidated endeavor for the group, not as individual accounts. With a 529 plan owned by grandparents or a Roth IRA earmarked for education, this can be done. (We should note: owners of 529 college savings plans may change the beneficiaries among siblings or cousins with no adverse tax consequences.)

Consider this example. If there are seven grandchildren, you can allocate 1/7 of the total college fund balance to the oldest, then 1/6 of what remains to the second-oldest, and so on as each grandchild reaches college age.

In the case 529 college savings accounts are used, transfers may be needed to set up the oldest with the proper balance. If a Roth IRA is used, a withdrawal in the proper amount can be made by the grandparent to meet education expenses, then the “paid” child is removed from the beneficiary (or contingent beneficiary) provision.

Proceeds of a gift via Roth may of course be used for purposes other than education, a house down-payment for example.

Some clients who have 529 accounts for grandchildren make adjustments from time to time among grandchildren’s accounts to reflect each child’s individual needs and to maintain a better sense of equity. Others deposit equal amounts for each grandchild and do not worry about differences that emerge later.

One general rule in college funding: the more removed the funding is from the child, the less impact it may have on college aid formulas. A 529 account owned by the child is 100% available for college expenses, but a Roth IRA balance of a grandparent or parent has little or no impact.

Clients, we talk about options and alternatives; you make decisions. If you would like to talk about strategies for your children or grandchildren, email us or call.


Prior to investing in a 529 plan, investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax-free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.


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Higher Returns, or Minimize Taxes?

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In the course of our research, we recently came across a survey of investors published by a large investment organization1. It contained an example of a technique that might be used to manipulate investors into a less-than-optimal path.

Would you rather minimize taxes, or achieve the highest investment returns? Many people might think that this is a straightforward question: the survey reported that 61% of baby boomers preferred to minimize taxes. In our opinion, it is indeed straightforward—just not in the way they think it is.

We pondered that question, and wondered why there was even a choice between minimizing taxes and going for higher returns. Generally, an investor comes out better off if she or he aims for the highest after-tax returns.

Peddlers of financial products know that if they can get a prospect to focus on taxes, then it doesn’t matter whether the investment is really any good or not. It merely needs to meet that very important objective of minimizing taxes. A tight focus on taxes takes the spotlight away from the actual investment and its performance.

We think a better approach is to include the potential impact of taxes in our investment decision-making. You may hate taxes, but it would make no sense to go for 1% tax free instead of 6% taxable (all other things being equal)—the higher rate would leave you better off even after you paid the tax.

Some of you are more concerned about income taxes than others. It doesn’t matter what your object is, we need to agree that seeking the highest after-tax returns is a more sensible goal than either minimizing taxes or achieving higher returns. In our reality-based approach, we can integrate both objectives to work towards a more sensible plan.

Each of you is free to make whatever decisions you would like to, with your money. (We never forget whose money it is.) If you bring it us, we are never going to focus on just minimizing taxes, or just focus on achieving high returns. That is a false choice, and a seller who presents that to you may be trying to manipulate you.

We seek to achieve the best after-tax returns—that is the path that potentially leaves you with the biggest bucket. No guarantees, of course. Clients, if you have questions about this or any other pertinent issue, please email us or call.

1 2016 U.S. Trust Insights on Wealth and Worth survey, U.S. Trust Bank of America Private Wealth Management


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific situation with a qualified tax advisor.

This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.