Saving money for other people

[ElaineMonster]

Ed and I would like to help my nephew out for college. He is six years old now and we have no children, but plan to. We'd like to contibute towards his education, but what's the best method?

We'd like to make sure the money is only spent on college but we can't trust his parents to do that. We also don't want to hurt his chances of receiving financial aid so should we keep it in our names until he gets older? (He will most certainly qualify for financial aid unless my sister wins the lottery).

What are the tax implications for us if we choose to save this money for him in our names rather than his? Seems like we should put it in his name if we can trust that his parents won't steal it or let him spend it early, but I'm not sure we can cound on that.

We were thinking bonds, by the way, because we think giving him bonds every birthday and holiday would help him learn about money, without much risk. Are bonds a good instructional tool for kids? (We're sorta using my nephew as a guinea pig to test this stuff out on before we have our own kids. heh)

Thoughts?

[ElaineMonster]

Well, I think I found the answer. The 529 accounts. Anyone with experience?

[Dazarath]

This site has some information. I can't offer more than that because I don't know anything about them.

http://www.fool.com/college/college.htm

[Carl_William]

Internet sites:

http://www.collegeadvantage.com/

http://savingforcollege.com/

Also Iowa and Nevada might have some excellent plans.
I think Nevada is expense free but might also be risk free with a low return....

Good luck

[Carl_William]

I repeat: avoid the financial intermediary (the broker) if you want to avoid drpriving the kid of 12 to 17 pecent of the profit...

[jively]

[ QUOTE ]
Well, I think I found the answer. The 529 accounts. Anyone with experience?

[/ QUOTE ]
You're right, 529 plans are perfect for your situation: can only be used for education, and you control it with your nephew as the beneficiary.

There are many plans held with different companies, associated with the different states. You can use any of the plans, no matter which state you live in. You might want to check with the plans associated with your state, as you may get a state tax deduction when you put the money in. I live in New York, and NY's plan is with Vanguard and Upromise, and it is a good plan. Vanguard uses only index funds with low expenses. Upromise is good, maybe, because when you buy groceries, Upromise adds money to your account. (Ok, maybe you buy a 2-liter Coke and get $0.02, so it's not that great.)

Some of the plans are only sold by brokers, and the brokers earn a commission. Try to avoid that. If you use NY's plan, you do it yourself at www.nysaves.org. The simplest best investment choice is an "age-based" plan that has more stocks when the child is younger, and moves more to bonds as they get closer to college age. Most of the plans probably have this type of choice.

-Tom

[ElaineMonster]

Thanks Tom.

The more I read about the 529 savings accounts, the better they sound. It's the (almost) perfect solution for this situation.

It looks like we can retain control of the asset even after Joey turns 18. The withdrawls can only be used for college without penalty and the account can be transferred to another family member (including cousins) if Joey doesn't go to college or something. You can even set on up for yourself if you want to get that PhD.

And it doesn't have the income limits that some other savings plans have (the Coverdell ESA is only for people with incomes lower than $110,000/$220,000 if married). And the 529 doesn't have the contribution caps that other plans have. And it remains our asset, not Joey's, so he'll still be eligible for financial aid. This is awesome!

Downsides:
Contributions are not tax deductible (federal). They are only deductible for state taxes, and since we live in NV without state income tax, no need for a state tax deduction.

Transferring ownership to a cousin may not be possible after 2010, well before we'll know if Joey is going to college (he'll be 11). So, if something happens and Joey doesn't go to college, and they haven't extended the cousin transfer allowance, we would have to remove the money at a 10% penalty in order to give it to our children.

Anyway, still sounds like the way to go.
Thanks again.

[Rockatansky]

[ QUOTE ]
Thanks Tom.

The more I read about the 529 savings accounts, the better they sound. It's the (almost) perfect solution for this situation.

It looks like we can retain control of the asset even after Joey turns 18. The withdrawls can only be used for college without penalty and the account can be transferred to another family member (including cousins) if Joey doesn't go to college or something. You can even set on up for yourself if you want to get that PhD.

And it doesn't have the income limits that some other savings plans have (the Coverdell ESA is only for people with incomes lower than $110,000/$220,000 if married). And the 529 doesn't have the contribution caps that other plans have. And it remains our asset, not Joey's, so he'll still be eligible for financial aid. This is awesome!

Downsides:
Contributions are not tax deductible (federal). They are only deductible for state taxes, and since we live in NV without state income tax, no need for a state tax deduction.

Transferring ownership to a cousin may not be possible after 2010, well before we'll know if Joey is going to college (he'll be 11). So, if something happens and Joey doesn't go to college, and they haven't extended the cousin transfer allowance, we would have to remove the money at a 10% penalty in order to give it to our children.

Anyway, still sounds like the way to go.
Thanks again.

[/ QUOTE ]

So what exactly is the advantage of placing the money into a 529 rather than investing it in your own name and then paying for his tuition when/if he attends college?

[jively]

[ QUOTE ]
So what exactly is the advantage of placing the money into a 529 rather than investing it in your own name and then paying for his tuition when/if he attends college?

[/ QUOTE ]
It grows completely tax-deferred, and the gains are not taxable (under current law) when the money is withdrawn. Plus, all of these 529 tax laws are likely to stay (be renewed) before they expire in 2010. These are tax advantages for the middle class, and are very popular.

-Tom

[Carl_William]

Probably taxes