Posted on 10/20/2011 7:56:36 AM PDT by Kaslin
Dear Carrie: I have $85,000 to invest for my grandchildren's education. Where would you suggest I invest it? -- A Reader
Dear Reader: I applaud your idea wholeheartedly, with just one caveat. Before you move ahead, make absolutely sure you won't need that money for your own retirement. Err on the cautious side, and proceed with this gift to your grandkids only if you're confident you'll have the financial resources you'll need for yourself. You are being incredibly generous, but when it comes to retirement, it's hardly selfish to think of yourself first!
ACCOUNTS: LOTS OF CHOICES
That said, let's get to the meat of your question. Essentially, you're looking at four options: a 529 plan, a custodial account, a trust account, or simply investing using your own account (with the plan to make gifts to your grandchildren later).
The 529 plan: The most obvious answer, but not necessarily the right one, is a 529 plan -- the popular tax-deferred vehicle for college investing. (A Coverdell Education Savings Account can offer even greater benefits, but is limited to annual contributions of no more than $2,000 and then only if you qualify based on your adjusted gross income.) In a 529 account, investment income is never taxed, as long as it's withdrawn for "qualified" higher education expenses. Qualified means about what you'd expect: tuition and fees, room and board, and books and supplies.
Some additional benefits of 529 plans:
--You can make substantial contributions without triggering gift taxes. An individual can contribute $65,000, and a married couple can give $130,000 in a single five-year period (this requires a special election on your gift tax return).
--You control the assets. The child is the beneficiary, but the assets are in your name; your grandkids cannot access the money directly.
--You can transfer unused assets to a wide range of family members, which could be important. Say one grandchild was college bound, but the other wasn't; 529 plan assets could be shifted to the one headed for college without penalty.
--You might get a state tax break. Some states offer tax credits for 529 contributions.
So what's not to like? Well, 529 plans offer fewer investment choices than custodial accounts or trusts, and trading and exchanges are often limited. Plus, the funds can only be used for higher education. If you withdraw them for some other reason, you'll pay federal and state taxes on any investment income plus a 10 percent penalty.
A Custodial Account: If you're sure your grandkids will go to college, a 529 plan makes sense. But if your goal is simply to give them some financial assistance later in life, you might consider a custodial account. It's more flexible than a 529 in terms of what you can invest in and how your grandkids can use the money.
That can be a double-edged sword. You would control the investment now, but the assets must be given to the beneficiary when he or she turns 18, 21 or 25 (depending on your state and your wishes). Theoretically, your grandchild could reach the legal age and cash out the account to buy a Ferrari, and there'd be nothing you could do about it.
Earnings don't grow tax-free as they do with a 529 plan, but a custodial account may offer a tax benefit. Under the current tax code, the first $950 of investment earnings is tax-free and the next $950 is taxed at the child's, usually quite low, rate. After that, the marginal tax rate goes up to the parents' rate.
A Trust Account: If you want more control over the money, look at a trust account, either a Crummey Trust (the odd name comes from the first person who successfully set one up) or a 2503(c) Minor's Trust. These are more complex and more expensive than your other options. If they sound appealing, consult a trust expert to see if one of these structures would be right for you. With either a custodial account or a trust account, you will be limited to the annual gift tax exclusion of $13,000 per year per recipient ($26,000 for spouses electing to "split" their gifts).
Keep It in Your Own Account: One final option is simply to earmark that money for your grandchildren and keep it in your own name and your own account. Of course, you would need to stipulate your intentions in your will (or set up a trust), and potentially have part of it eaten up by estate tax. But the pluses are that you'll have complete control over how the money is invested and how and when it's disbursed. In addition, if you should happen to need the money yourself, it'll be available.
So you have a lot of options, though given the amount of money you plan to invest and assuming you are very confident you won't need it yourself, the 529 plan may make the most sense. Pick a plan with low expenses and a wide range of investment choices. Then make investment choices that match the time horizon you need and offer plenty of diversification. Target funds, which rebalance automatically as the date of matriculation grows nearer, offer a simple solution, so check them out.
Good luck -- and I am sure your generosity will be remembered for years and years to come.
Useless. Based upon current inflation, by that time college will run about $1.2M a year. Good luck saving for that.
Support your children in homeschooling the grandchildren.
Put the money away...make them work for their education.
Once they’ve graduated, are gainfully employed and are married, give it to them as a downpayment on their first house instead.
Why force the grand kids into college? By the time they are old enough to leave High School, we will need tradesmen and people who know how to build and create. These are good paying jobs and much more needed than another Sociology or Marketing degree dope whining about no jobs.
However many M1 Garands you buy with $60,000 along with however much ammo you can buy with $25,000, maybe? Or whatever combination you’re comfortable with.
By teaching them to get their hands dirty and sending them to a trade school.
Second. 15-20 year zero coupon bonds when the EPT tests positive. Don't send them to an expensive college, a local state school would be ok, and be sure to make them go to vo-tech school while in HS to 1) pick up college credit, and 2) give them a blue collar education. I suggest welding, machining, electrical and plumbing classes...something to fall back on just in case. They will thank you for it later.
donate to Organize Wall Street so that in the future it will be free /sarc
As a CFP myself I usually tell my clients should never use the UTMA/UGMA for college funding in case there is a probability of financial aid. If a large lump sum can be made early in the child’s life then the 529 can make sense.
If not, give the money to the parents to invest. It works better than in the kid’s names for financial aid.
And I ALWAYS advise them to buy the book “How to Pay For College Without Going Broke” by Kalman Chany, who truly is America’s best expert on the subject.
That way, they are mature enough for college, and can go ROTC or OCS after they complete their BA.
Buy them a pick and shovel...that is where we are headed and they will learn more working with their hands then they will in any of our government financially bloated education centers.
Take the money you’ve set aside for your child’s college education and invest it in a rolling concession stand. After a couple of years, your kid can pay for their own education if they still want it.
Useless. Based upon current inflation, by that time college will run about $1.2M a year. Good luck saving for that.
First of all, anything helps so useless is not true. Second, pre-pay is an incredible way to save. Tell them to go to the military is another savings as the military has a great GI BIll. Many Many options.
And college level textbooks that pre-date PC, along with current reference books that are too generic to be able to turn into propaganda vehicles.
Why force the grand kids into college?
Because they want to eat. Seriously trade schools are good if the kid has that ability. Second, going to college in the long run will give you a much better chance for upward mobility. Sure trade schools will allow you to make some money but college will allow you to make much much more. If I had not gone to college, I would not be making as much as I am now. Go to college grandkids.
Take the money and buy them as much good fertile farmland out in flyover country as you can afford. You will have absolutely no problem renting it out until they are of age, and they can then decide whether to sell it and use the money to go to college, or keep it and have a source of income and a place to live, no matter what happens between now and then. I’m serious.
By the time the kids get there, education will be ‘free of charge’.
That way, they are mature enough for college, and can go ROTC or OCS after they complete their BA.
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