CalKids and 529 Planning

by | May 31, 2023 | Wealth Management

By: Henry VanBuskirk, CFP®, Wealth Manager

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If you are a new parent, your mind is probably swirling with a myriad of thoughts about your child’s future. Your head is likely ringing with questions that you need answers to like:

  1. Do I have enough life insurance coverage?
  2. What changes to my budget do I have to make to maintain our lifestyle?
  3. How do I save for my child’s future education needs?

While our firm helps answer these questions and many similar financial-related questions for new parents on a regular basis, I would like to take some time to focus on question #3 – “How do I save for my child’s future education needs?”. The answer to this question is dependent on your philosophy when it comes to saving for your child’s future education needs. College education may be very important to you, you may want your child to go to a vocational school, or you may just want to make sure that your child has a nest egg to use at their discretion when they reach adulthood. If you are a California resident, the state of California has a new program called CalKids that can help answer part of this question. Before we discuss this state program, I would like to briefly go over the ways people traditionally invest and save for minors.

Investment vehicles that offer the most flexibility for the child are UTMA (Uniform Transfers to Minors Act) accounts or earmarking a taxable brokerage account owned by the parents that are for the child’s use when they become adults, but the parents maintain control of the account. UTMA accounts are considered gifts to the child and when the child reaches the age of majority (normally age 18), they become the rightful owner of the account and can use the proceeds on whatever they would like. Some people don’t like UTMA accounts since they pose a risk. Think about your mental state at 18. Would you want your child to receive that sum of money you saved for up to 18 years to go to your now 18-year-old adult child to spend it on whatever they wanted? Some people wouldn’t mind, but other people would. That’s where earmarking a taxable brokerage account owned by the parents comes in to play. The account owner would retain control of the account even after the child reaches age 18.

If you are gung-ho about making sure your child goes to college or vocational school, the 529 plan may be the best fit for you. The 529 plan allows for tax-free growth and tax-free withdrawals as long as the funds are used for qualified educational expenses such as tuition and room and board. With the new Secure Act 2.0 legislation that passed, up to $35,000 of unused funds can over time be rolled over into a Roth IRA in the 529 plan beneficiary’s name. This allows for some optionality for helping set up your child’s future success in education and/or retirement.

What do these investment vehicles have to do about the CalKids program? They all have one common thread. They are all just mechanisms to help save for your part of your child’s future goals, whatever they may be.

The CalKids program is a program that gives parents of children born on or after June 1, 2022, regardless of the parent’s income, up to $100 for that child to use for college, vocational, or professional schools. Here is the exact breakdown of how that $100 is awarded:

Picture1 2

CalKids also offers additional funding for some students in grades 1 through 12 that are deemed in a low-income household by the state, as defined by the Local Control Funding Formula, can receive additional awards from the state:

Picture2

The CalKids program works very similarly to a 529 Plan, where the funds are invested, grow tax-free and distributions are also tax-free if they are used for qualified educational expenses. Similar to a 529 plan, the investment growth on CalKids funds that aren’t used for qualified educational expenses are taxed at ordinary income with a 10% penalty. Even if you use the funds for items other than qualified educational expenses, if you have an eligible newborn signed up for the CalKids program, they still received that CalKids money for free. BFSG has helped thousands upon thousands of clients in our 30+ year history and we still have yet to find a person that objects to receiving free money. Even if you have no intent on setting up a ScholarShare 529 college savings account (California’s state 529 plan) and you have no reasonable expectation that your child would be identified as being in a low-income household, you can still get $50 from the state of California just for letting the state know you have an eligible newborn and are willing to register the account on the program’s online portal.

If you are planning on having your child go to college, private school, or vocational school and will therefore have tuition costs, utilizing the CalKids program and investing in a 529 plan could be instrumental in helping you reach the goals you have for your child’s future education needs. Educational planning is one of the main pillars of financial planning and might be your highest or lowest priority to you right now. Similar to a tax professional combing through the tax code to try to legally maximize your tax refund, our job as Certified Financial Planner™ professionals is to sift through current and pending legislation to educate you on how to legally maximize your potential for meeting your short-term and long-term financial goals through tailored investing strategies, efficiently using the tax code, and utilizing state and national programs when appropriate to help meet those future financial goals. After all, if you’re a California resident with a child born after June 1, 2022 (and you made it this far into the blog post), you just learned how you can be awarded up to $100 from the CalKids program regardless of your income level.

If you are interested in sitting down with our team of CFP® professionals to help you compartmentalize your financial goals through a comprehensive financial plan, please feel free to email us at financialplanning@bfsg.com or give us a call today at 714-282-1566.

 Sources:

  1. https://calkids.org/wp-content/uploads/2023/03/CalKIDS-Program-Information-Guide-3.7.23.pdf
  2. https://www.gov.ca.gov/2022/08/10/california-officially-launches-nations-largest-college-savings-program-for-millions-of-students-and-all-newborns/
  3. https://calkids.org/help-resources/frequently-asked-questions/

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

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