Navigating Adulthood

Navigating Adulthood: Essential Factors to Consider During Your Child’s College Transition

Bags packed? Check.
Meal plan selected? Check.
Do we know which dorm we’re going to? First one on the left after the quad.

A child coming of college age is an exciting time for the entire family. It presents a world of opportunities and the beginning of a new chapter for parents and children alike. However, with so much going into college decisions and the application process, it can be easy to lose track of the financial transition that young adults face as many of them leave home for the first time. Here are some of the considerations to keep in mind to help ensure a smooth transition:

1. Begin building a strong credit score.

While you may have been teaching your child financial literacy for a few years, now is the time they are able to legally put that education into practice. Be mindful in selecting a credit card that best suits your child’s needs in terms of credit limit and interest rate.
While you may enjoy various benefits with your personal credit card, it may not be the best match for your child’s first foray into personal credit. To err on the conservative side, consider a no-fee, low interest rate or student credit card. Your child might be eager to accrue points and earn travel bonuses, but when starting out, setting a foundation for a strong credit score and strong fundamentals is key.

2. Create a financial plan.

Much like your child’s first credit card, a spending and savings plan is essential to laying a strong foundation for their financial future. You may want to consider opening multiple savings accounts for your child to build funds for a long-term goal or emergencies. Planting the seeds at age 18 for paying a substantial expense, like a down payment on a house, could result in invaluable financial planning lessons, as well as preparedness years later.
Ensure that your child’s bank accounts have monthly minimums for balance and deposits that match their circumstances. Whether that includes a no-fee structure or automatic transfers from checking to savings accounts, align the financial goals of your child with the bank’s terms and conditions.
Your family may want to discuss how you and your child want to handle finances moving forward as it relates to their financial independence. Does that include an infusion of funds as needed or on a regular basis? Perhaps a sliding scale as they get older? If they intend to generate income on their own, it is important they understand the tax implications of the state where they are attending college might be different from the state where you reside. The right balance of guidance, independence and support will make for an easier transition over time.

3. 529 management.

It is possible that the money set aside in a 529 plan exceeds your child’s educational costs. Perhaps they transfer to a less expensive school, receive a merit-based scholarship or you simply overestimated how much to save relative to college expenses. Whatever the case, it is important to understand the options available for excess 529 funds.
To avoid being taxed on the earnings within the 529 Plan and a 10% withdrawal penalty, one can consider a few different strategies. If your child aspires to complete graduate school or other types of continuing education, 529 funds can be used to pay for it, as they do not expire. If they keep the funds invested, they will continue to accrue for their future education-related use.
Additionally, a 529 balance can be transferred to another beneficiary, meaning you could use those funds for a younger child. And thanks to the Secure 2.0 Act of 2022, up to $35,000 of residual 529 funds can be transferred to a Roth IRA for the 529 Plan beneficiary under certain circumstances. For all these options, it is imperative to consult with a Private Advisor for guidance, as restrictions and tax considerations apply.

4. Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA).

The primary advantage of these types of custodial accounts is their convenience in providing financial gifts to children without the complexity of establishing a trust. It is important to remember UGMA/UTMA brokerage accounts are viewed as the child’s assets. Regardless of the account type, the custodian must transfer the account to the child at a young age (between 18 and 25, depending on the state), allowing the funds to be utilized for any purpose. If your child has these types of accounts, it is important to discuss with them how these funds fit into their financial plan, as well as consult with a Private Advisor to understand the tax implications resulting from withdrawals, and options for re-investing the funds into a different type of investment account.

5. Assign a power of attorney.

While an 18th birthday is a benchmark in transfer of responsibility from parent to child, you may want to consider discussing with your child the advantages of establishing power of attorney as a temporary safeguard. In case you ever need to access your child’s financial or medical records or make a decision on their behalf, you will not be able to do so without a power of attorney. A durable power of attorney may be particularly of interest if your child plans on traveling for an extended period of time, like in the case of a semester abroad.

The transition to adulthood can come quickly, but fostering financial success for your children as they transition through the next phase of their lives begins with education and guidance. Whether you have a question about one of the aforementioned points, financial education, or a different aspect of your child’s turning 18, please reach out to your Rockefeller Private Advisor to learn more.