Revealing Their Intentions

Lisa wants to have an educational savings account for her kids to go to college, but she wants them to have a hand in paying for it, too.

QUESTION: Lisa is thinking of saving for her child’s educational savings account. They don’t know how much to invest because they think their kids should be partly responsible for that. Does Dave agree with that thinking, and what if they fund a 4-year account and the kids only go to a 2-year school? Dave tells her what he did in the same situation.

ANSWER: If they don’t go to school, it can be transferred to a sibling. Either that, or they will be penalized out the wazoo. They’ll get a 15% penalty plus your tax rate when they take the money out of a college savings plan.

I had these same questions 20 years ago, before the educational IRA was available. When we started saving for college, Sharon and I asked the question of what happens if they don’t go to college or misbehave with this money. We used the old UTMA accounts, or Uniform Transfer to Minors Act, which basically means that at 21 the money is theirs.

The thing is that they could be on drugs or something. The money would be theirs and legally you can’t stop them. We raised our kids to believe they were going to a 4-year school, and they spiritually and intellectually believed they didn’t have a choice. The second thing we decided is that, if our kids are living a bad lifestyle and there is money sitting there for them that could be used to continue that lifestyle, it’s legally their money but they’ll have trouble finding it. That’s the stance I took to make sure that this money would bless them and not curse them.

If you want to do the 2-year deal, then underfund it. That way, you don’t end up with too much money that will be taxed. If they go to a 4-year school, then they are responsible for the other 2 years. We pay for the undergraduate schooling, and if they want to go to graduate school or a more expensive school, they pay for that part.