Investments in Parents' Names
Many parents choose to make investments under their own names, earmarking these assets for their children's education. Investing this way affords both a level of freedom and a level of control. Parents are free to use the money however they wish without penalty which may be a temptation but it is also valuable should other family needs become more pressing.
Also, parents can ensure that money they have invested toward education actually goes for that purpose. Children only have as much control over these assets as their parents grant them. The downside is that you may lose out on the tax benefits other investment choices may offer.
Here are three options for investing in your own name for your children's education:
Open an ordinary investment account with the intention of spending the money on a child's future education.
With this option, you can withdraw the money at any time. If your family needs change, you may use the money for other purposes without penalty. There is no special tax treatment for this type of investment, but it is a simple way to get started on your college investing.
Establish a trust, a legal arrangement that allows you to tailor an account specifically to your needs and wishes.
The assets in a trust account may be set up with the child as beneficiary. The documents creating the trust will spell out exactly how the money may and may not be used. Under this arrangement, a trustee is responsible for investing and managing the assets. You should seek expert counsel when considering this option, because trusts are designed to take into account your entire financial situation, as well as current tax and estate law.
Draw on tax-advantaged retirement assets. One of the reasons investing for college can be difficult is that most parents are investing for their retirement at the same time.
The rules governing IRAs now appear to recognize this common situation and link the two goals together. You can now withdraw money from your IRA at any age without penalty if the assets are used for your children's qualified higher-education expenses. Furthermore, many company 401(k) plans allow employees to take distributions to pay for higher education.
Even though this option appears to offer easy access to potentially large sums of money, it is best considered only if you're among the lucky few who have accumulated more retirement investments than you think you'll need to live comfortably. Exhaust reasonably-cost college loans and other programs that are available to help finance education. Similar options for funding retirement simply don't exist.
Remember: Neither colleges nor the government expect you to use your retirement accounts to pay for education. Financial-need formulas don't count retirement assets when determining your ability to pay for higher education.