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Setting up a College Fund

rjakapeanut

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i'm really interested in setting up a college fund for my little sister. i want to put away money for her every year and hopefully get a situation going where it's gaining some interest so things are easier for her later on in life.

what are some good investment options when you're trying to safely put away money for a loved one? i really have no idea about this kind of stuff so feel free to give even the most basic advice. like i said, something safe + some interest obviously if at all possible.
 

BC2012

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Originally Posted by rjakapeanut
i'm really interested in setting up a college fund for my little sister. i want to put away money for her every year and hopefully get a situation going where it's gaining some interest so things are easier for her later on in life.

what are some good investment options when you're trying to safely put away money for a loved one? i really have no idea about this kind of stuff so feel free to give even the most basic advice. like i said, something safe + some interest obviously if at all possible.


How "safe" are you looking to be? A 529 plan that is really a mutual fund investment carries risk and carries higher rates of return than a CD, which is vastly safer but nets you, historically, less return.
 

rjakapeanut

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Originally Posted by BC2012
How "safe" are you looking to be? A 529 plan that is really a mutual fund investment carries risk and carries higher rates of return than a CD, which is vastly safer but nets you, historically, less return.

i was thinking pretty much no risk of me losing any money, and for that i expect minimal gains. but i'm definitely open to learning about any investment opportunities, even risky ones, because i'm always trying to learn about this stuff. i'd love to hear about the 529. ill google, too.
 

deaddog

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Most 529 plans have a "principal protection" option that is really just like a CD or money market - low return, low risk. Designed for older kids about to enter or already in college where there is no time horizon to earn bigger returns and/or recover from a loss. Better than a regular CD because any growth (however small) is tax free and, depending on your state, you may get a deduction for your contribution
 

dr.no

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Kudos for your intention, educational expenses are growing way out of control.

Every state has a different investment management sponsor for its 529 Plan, some plans are better than others (do a google search for the top rated ones). If you choose your own state's plan, you may be able to deduct your contribution from your state taxable income up to some limit. You may choose to set-up a 529 Plan in a different state because they have better investment options/lower fees. Regardless, every plan will have a range of options to tailor your risk/target return profile.

I use NY's because it's sponsored by Vanguard and I much prefer indexing over active management.
 

BC2012

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Originally Posted by deaddog
Most 529 plans have a "principal protection" option that is really just like a CD or money market - low return, low risk. Designed for older kids about to enter or already in college where there is no time horizon to earn bigger returns and/or recover from a loss. Better than a regular CD because any growth (however small) is tax free and, depending on your state, you may get a deduction for your contribution
This is true. You get age-based, risk-based, principal protection, and other investment options when you go into a 529 plan. The 529 plan may have tax benefits that a CD will not and may be beneficial for you. You'll need to check with a financial advisor if you want a state-by-state 529 comparison with advice, though. Or at least, I would. The fund I am most familiar with (because I helped trade it) had a full range from aggressive options for younger kids to conservative for older kids. To a lot of other ones.
 

Michigan Planner

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I believe that the interest earned on certain bonds can be tax free if the bonds are eventually used to pay for education expenses so if you want something with little to no risk that might be something to look into.

If you have a decent amount of money to invest into her education savings right off the bat, you may want to look into a trust instead of a 529 that makes periodic payments once she enters college since it would allow the funds to be used considerably more flexibly than the 529 plan (you may be able to start a trust with a smaller amount though and make deposits to it as she gets older though as well). My complaint about 529s is that if the funds are not used for education purposes they are taxed at a higher rate so if your sister gets a big scholarship or something (and you have nobody else to transfer the plan to) you could get screwed come tax time - with a trust fund, you do not have that issue.
 

Usul

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I just had a small run in with 529 accts in the State of MO, you may find this helpful.

For Federal Gift tax purposes the contribution to a state 529 acct qualifies as a gift of a present interest to the individual allowing you to use you annual exclusion from gift tax against the amount. You can also make an election to clump five years of annual exclusions into one year of contributions, simple compliance.

Nonqualified withdrawals are generally subject to a 10% penalty and a tax on earnings, but withdrawals that are substantiated by scholarships are exempt from the penalty. This means that if a scholarship reduces the cost you will not be punished for funding the 529.
 

Michigan Planner

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Originally Posted by Usul
...but withdrawals that are substantiated by scholarships are exempt from the penalty. This means that if a scholarship reduces the cost you will not be punished for funding the 529.

Very interesting. That's always my biggest fear when I start thinking of what we are going to do for my daughter's college savings (luckily she's only a few months old so, at current costs for universities, we have at least another few weeks to start socking the money away).
 

junkyard_sal

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You can give your sister money (tax free up to 13K/year) or use a 529.

I transfer money to my daughter every two weeks (she is 1 year old) and I give her money at bonus time. I have been investing the money in pre-funded muni-bonds and getting around a 5% tax exempt return.

My issue with 529s is that they have not done all that well since they were started. The tax advantage of 529s is worthless if they lose money. There are also some financial aid implications that are not broadly discussed.
 

Benzito

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You need to be very careful about flat out gifts or setting up accounts in the prospective student's name. Per many financial aid policies, any funds in the student's control are automatically factored into their aid eligibility.

With many 529 accounts, you continue to own the account set up for the benefit of the student. It will grow, tax-free, and withdrawals are okay for educational expenses. If any or all of the account is not used for education, the gains would be taxed at the regular rate (I am not sure if there is a penalty for early withdrawal akin to an IRA).

Best place to start is to Google your particular state and see if there is a tax benefit for contributions (Oregon has one (for its residents and taxpayers only), which makes it instantly more attractive than other states). Go to Clark Howard's website as well.
 

deadly7

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Originally Posted by Benzito
You need to be very careful about flat out gifts or setting up accounts in the prospective student's name. Per many financial aid policies, any funds in the student's control are automatically factored into their aid eligibility.

At an alarming amount as well. I think it's something like 60% or 80% of dollars in the student's name that are seen as "eligible money" to spend on college tuition. The figure is less for parents. In other words, get a reliable third party to put his or her name on the account [maybe with you as a cosigner] so that your sister doesn't need to worry about getting reamed later on.
 

junkyard_sal

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http://www.savingforcollege.com/fina...ur_savings.php * 20% of a student's assets (money, investments, business interests, and real estate) * 50% of a student's income (after certain allowances) * 2.6%- 5.6% of a parent's assets (money, investments, certain business interests, and real estate, based on a sliding income scale and after certain allowances) * 22%-47% of a parent's income (based on a sliding income scale and after certain allowances) Good article. When our daughter was born one of the first appointments that we made was with an estate attorney. How you save depends on how much you earn and your expectation of qualifying for financial aid. There are some tricky issues with the trust. When setting it up you should consult an estate attorney. The article does a good job explaining it all.
 

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