I have seen a number of college students avoid the kiddie tax (often because they’ve got good jobs working for the family business), but you make a very good point. I should have discussed this reality… but didn’t…fortunately you nicely cover. Thank you.

Regarding the go-to-college statistics and stay-in-college statistics… I wish they were misleading. But I’m afraid I don’t think they are.

8/12/2014 Edit/Addendum: After originally replying to Frank Wilson’s constructive criticism regarding the kiddie tax stuff, I found myself thinking, “Gosh, why haven’t I seen more returns with significant kiddie taxes even though the parents have saved money in the kid’s name?” And after noodling around with Lacerte a bit, I think the answer is complicated. First, obviously, the last year in college, a kid who goes out and gets a job probably won’t be subject to kiddie tax because via earned income he or she will contribute more than half of their support. Second, if the parent’s income is middle-class, the capital gains tax rate used in the kiddie tax calculations equals 0% which will on its own drop the kiddie tax to zero or a very modest value. And third, if the kid doesn’t qualify as a dependent on the parents’ tax return, on the kid’s 1040 return, he or she gets a full personal exemption which may shelter investment income. So, bottomline, the kiddie tax issue that Frank Wilson raises is excellent. But I think parents probably want to work the numbers out to see how much actual damage the kiddie tax creates…

I also think the statistics you post on finishing college in four years may be misleading. Many of those who start college but don’t finish in four years don’t drop out completely, but take more than four years to finish, making a 529 account even more valuable, not less so.

I think you need to rethink your advice I this column.

I think your points are all really good and very valid… E.g., the UTMA or UGMA account is the child’s… for good or bad. If a parent wants control, yup, that’s not going to work.

Regarding the financial aid element, also true… though (and here we probably need to talk about specific income levels of parents, etc.) I wonder how much need-based financial aid a child from an affluent family able to save a bunch into a Sec. 529 plan really gets. In the situations where I have first hand knowledge, (my kids, nieces and nephews, clients’ kids, etc.) people able to save big amounts into a UTMA or Sec. 529 or who have saved big money into an UGMA or Sec. 529 are getting basically no financial aid.

You make a good point about an ability to shift the dollars to another person… but if you’ve also provided for your other children (so shifting to a sibling isn’t needed), the idea of shifting funds to (say) a niece or nephew … or jumping ahead to the next generation seems a bit of a stretch to me. I care about my nieces and nephews… but I’d personally rather help my kids buy a business or make investments.

But, to summarize, your points are good and definitely something that parents, grandparents should include in their analysis. Thank you for sharing them. 🙂

Secondly, most financial aid packages consider the student’s income (those capital gains you pooh pooh) and assets as being almost solely intended to pay for education. Money in a 529, being an asset of the parent, only has about 6% of its value per year included in the expected family contribution calculation.

Furthermore, if the child doesn’t go to college, the money can be shifted to another sibling, neice, or nephew. With an UTMA account, the money belongs to the child and must be spent on or by them regardless of whether they go to college.

All of these issues could be avoided if the parents keep the money in their own name in a regular account, but then they don’t get any tax benefits.