College is an investment in your child’s future and it is no doubt worth it, but with education costs rising, it can certainly be expensive. Planning for your child’s education should be a priority and many benefit from starting early. Starting a “college fund” in a child’s early years can be a smart investment, as it maximizes the amount of time you have to save, while also maximizing the amount of interest your money has time to earn. Many consider a 529 College Savings Plan a great way to save for college because it sets aside the money and grows tax-free. But if your child has special needs, there may be more to consider. The Academy of Special Needs Planners recently discussed ‘College Savings for Students with Special Needs’ in their most recent newsletter, highlighting the pros and cons involved with various types of college savings options.
On the most basic level, a 529 College Savings Plan is an account set up for someone who is planning on attending college. Once the account is created, anyone can contribute to it and contributions to a 529 account qualify for $14,000 annual gift tax exclusion. A 529 College Savings Plan is also incredibly attractive from an investment standpoint because it is not subject to income taxes, maximizing the amount that will be available to the child when they attend college.
When considering a 529 College Savings Plan for a child with special needs, attention should be paid to how the account is set up and how it is utilized. Because of the way income limits impact government benefits and Supplemental Security Income, the 529 account should be handled carefully, and it should not be setup in the name of the child with special needs. (Although, choosing to set up an account in a child’s name is always something that should be considered given the impact it may have on financial aid options, which tend to be simpler when a parent holds the account.) If a relative sets up the 529 College Savings Plan for the child with special needs it will not impact the income of the child.
While a 529 College Savings Plan is an appealing investment and one that will greatly benefit a child planning on attending college, this aim can be complicated when considering a special needs child who is uncertain about college. If a 529 account is set up and the child ultimately does not need the money for a college education, giving the funds to the intended recipient for other uses may become problematic. A large gift could impact their benefits and it could also present tax consequences for you.
In these circumstances, it may have been better to use another savings vehicle or a special needs trust. A special needs trust can be created by anyone and is not limited in what the money must be used for, although it will not grow tax-free. A third option, and one that may be appealing in its simplicity, is to set up an investment account for yourself and use that money to pay for part of a child’s education. (If they do not attend college, the funds can be used for other expenses as the owner of the account sees fit.) Because a third party paying for educational costs doesn’t affect benefits, this may be an extremely attractive and straightforward option, although it does not have the tax benefits of a 529 College Savings Plan.
If you are considering an investment into the education of a special needs child, speaking with a special needs planner may be the best way to determine which choice is right for you.