Client Background
A couple with a young child approached us to plan for their child’s future education. They wanted a flexible savings vehicle that accounted for the possibility that their child might not attend college.
Challenge
The couple was torn between a Uniform Transfers to Minors Act (UTMA) account and a 529 plan. They were concerned about committing funds to a 529 if their child chose a non-educational path, potentially facing penalties or taxes on withdrawals.
Solution
After comparing options, we recommended a Colorado 529 plan due to its flexibility and tax benefits. Contributions to a Colorado 529 plan qualify for a state income tax deduction, and earnings grow tax-free when used for qualified education expenses. We outlined the following pros for each option:
| Feature | UTMA | Colorado 529 Plan |
| Tax Benefits | No tax deductions; earnings taxed annually | State tax deduction; tax-free growth for education |
| Flexibility | Funds usable for any purpose | Primarily for education, but flexible options |
| Control | Child gains control at 21 | Account owner retains control |
| Investment Options | Broad investment choices | Limited to plan’s investment options |
If the child does not pursue higher education, the 529 plan offers flexibility:
- Change the beneficiary to another family member.
- Use funds for vocational or trade schools.
- Withdraw funds for non-educational purposes (subject to taxes and a 10% penalty on earnings).
- Use up to $10,000 for student loan repayment or K-12 tuition.
Results
The couple began monthly contributions to a Colorado 529 plan, benefiting from the state tax deduction and tax-free growth. The plan’s flexibility reassured them that their savings could adapt to their child’s future choices, whether educational or otherwise, aligning with their goal of financial security.
Are you planning for your child’s future with flexibility in mind? Contact Michael Brady for a personalized consultation to discuss how your wealth can align with purpose and possibility.