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Saving money for other people
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? |
#2
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Re: Saving money for other people
Well, I think I found the answer. The 529 accounts. Anyone with experience?
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#3
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Re: Saving money for other people
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 |
#4
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Re: Saving money for other people
[ 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 |
#5
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Re: Saving money for other people
[ QUOTE ]
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) [/ QUOTE ] I don't like the idea of bonds. US savings bonds give you about 4%, so it doesn't grow very fast. Plus, in the old days, the actual bonds sometimes get lost, and it is a real pain trying to remember about them or get them replaced. (I think now it's done online at www.treasurydirect.gov so it's probably better.) Back around 1997, I thought I would try using individual stocks using DRIP plans. I had some of my own, and gave shares to my brothers and sisters for Christmas presents. This also turned out to be a real pain, as the owner has to keep track of the cost basis, by basically keeping every quarterly statement forever... If they lose statements they end up paying more tax when it's sold. Plus it's not diversified having just 1 or 2 stocks. So I guess the 2 best choices are mutual funds held directly with the mutual fund company, or a brokerage account at a place with access to no-transaction fee mutual funds. The registration would probably be a custodial account: Elaine Monster custodian for Nephew Monster. It uses his SSN, and he needs to get the tax forms each year. But as custodian, only you can ask the brokerage to issue a check, and only to pay for something for him, like college. At 21 or 18 (varies by state) the money is legally his. -Tom |
#6
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Re: Saving money for other people
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. |
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Re: Saving money for other people
[ 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? |
#8
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Re: Saving money for other people
[ 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 |
#9
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Re: Saving money for other people
[ QUOTE ]
The more I read about the 529 savings accounts, the better they sound. It's the (almost) perfect solution for this situation. [/ QUOTE ] Yep. After you answered your own question in only 13 minutes, you have done a lot of research, and answered this probably better than I could have. [img]/images/graemlins/smile.gif[/img] [I am a financial advisor.] [ QUOTE ] 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. [/ QUOTE ] This is something that is likely to be renewed. This could easily be made permanent. It is a very popular tax treatment for the middle class. -Tom |
#10
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Re: Saving money for other people
There are many ways to save:
One way is a 529: Most states now offer 529s. If you choose a 529; at all costs avoid brokers "the so-called financial intermediary." The broker does nothing and sucks off about 15 to 20 percent off the profit that would go to the kid's education. Check out a few states. If you choose the state you live in; you can deduct maybe up to $2000 off of your state income tax bill (if your state charges Income TAX). Ohio has a good plan. It’s called the College Advantage with Vanguard Group, Putnam, and the Fifth Third bank participating in the plan. For mutual funds, the Vanguard Group is the best or better deal with much lower expenses than Putnam. The bank deal is essentially only savings or CDs, and they charge no expenses (i.e., extra expenses – they don’t run banks on air). I would pick Vanguard. And repeating myself – always go directly to the state to initiate a 529 – avoid the greedy broker at all costs. In Ohio; The broker charges a 5.25% upfront load, and a 1.4% yearly expense ratio. That is; money saved using a broker (Putnam) in the first year (or last year) has to make 6.45% just to break even – a real rip-off. ----- Upfront loads and expenses in Ohio: (1) Vanguard: Zero up-front load and 0.4 percent yearly expense ratio. (2) Putnam (via the Ohio State agency) : Zero up-front load and 1.0 percent yearly expense ratio. (3) Putnam (using a broker “financial intermediary”) charges a 5.25 percent upfront load and a 1.4 percent yearly expense ratio. (4) The Fifth Third bank offers savings or CDs and charges no-extra expense (zero risk, but probably the lowest return in the long run) You can see that Vanguard has much lower expenses than Putnam; and much-much lower than the broker. In any 529 plan; you have your choice to designate who will monitor the plan: you, the parents, an aunt or uncle, whatever. Of course you would choose a responsible person – not a crazy momma with ten credit cards (maybe I’m just kidding – but….). The phone number for Ohio is: 1-800-afford-it ( 1-800-233-6734). You can get a list of all the 529 providers on the Internet. |
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