Long term investment plan for my kid's future?

[DaSpade]

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I've heard bad plans about college saving funds that the way they work make it hard for students to qualify for student aid. I'm not sure the validity, but I've heard that somewhere.

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That used to be true, and still can be if you aren't careful.

Generally the best choice is a 529 college savings plan for money that is highly likely to be used for college eventually. The 529 plan allows you to invest money and it grows tax deferred and can be distributed tax-free for higher education expenses. There are several key advantages to these plans:

- YOU own the funds, which is good for financial aid purposes.

- You can use any states plan, but you should look to see if your state's plan gives you an additional tax break.

- The funds can be used for any school regardless of state.

There are two types of these plans. In one type you are pre-paying the cost of school and entering a contract to avoid tuition hikes down the road. In the second you are letting the market do the work and developing a pool of money to pay for school.

If you want to put away money and not worry about using it for college your best choice is likely a simple taxable mutual fund account. Let me know if you want more information or have other questions.

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I am looking into the 529 college savings plan, but also would like to hear about the mutual fund account that you have mentioned. I would like to keep her account mostly unmanaged for the time being(i.e it would not require my active involvement).

Thanks.

[wdcbooks]

You can go to www.vanguard.com and select a Target Retirement fund that corresponds to the date you might need the money for your daughter. So if she is going to college in 2025, you can use the 2025 fund. Vanguard uses passive management so you won't have a lot of taxes to pay each year, but you will have some.

The advantage of the mutual fund account is that there are no restrictions on how and when you can use it and you can choose any investment vehicle you want.

The disadvantage is that you have to pay taxes on your gains.