Q: I want to help my grandkids by setting aside some money for their college educations. Currently, I’ve just opened an investment account in their names. Is there a better way to do this?
A: There is a better way. My suggestion is to open a 529 college savings plan directly with the State of Michigan (go to www.misaves.com).
To start, the money you contribute to a 529 plan might enjoy a state income tax break. The maximum tax benefit is ~$200 for a single person or $400 for a married couple. It’s not huge, but it’s something.
Next, a 529 plan’s investments enjoy some major tax benefits. The income earned in the account is never taxed if the money is used for qualified education expenses. The list of approved is very encompassing. IRS Publication 970 spells them out.
Plus, you won’t lose control of the money in the plan. Most importantly, your grandchildren won’t automatically get the money at age 18. This is in direct contrast to your current setup.
Now, if it turns out that one of your grandchildren isn’t college-bound, you can always change the beneficiary designation to another family member. Of course, you can even take the money back, but know that the earnings portion is subject to tax and there is a 10% penalty on those earnings, too.
Finally, if there is money left over in the 529 plan, and it’s been open for at least 15 years, new rules allow for the money to roll into a Roth IRA for your grandkids. There are many rules around this, but it’s a very interesting feature to keep in mind.
Q: I’m growing tired of sending in my quarterly estimated tax payments. It seems there must be an easier way to get the government their money. Any suggestions?
A: Quarterly estimated tax payments can be a bit of a pain. After all, who likes deadlines? Fortunately, there are some alternatives that might make this easier.
One option is to make your estimated federal tax payments through four automatic, scheduled draws directly from your checking account. This can be set up right on your previous year’s tax filing. Ask your tax preparer about it. However, Michigan tax payments will still need to be made the traditional way.
There is another option for those who are drawing from their retirement accounts, receiving a pension payment or even collecting Social Security. If this describes you, you can have the correct amount of federal and state income taxes withheld directly from these income sources. It takes a little math and a good tax projection, but it’ll eliminate the need for quarterly estimated tax payments.
