There are several ways to do this but in my opinion if you know that this money is specifically earmarked for college then you will want to consider a 529 plan or college savings plan. They call these plans 529 because they are named after the IRS tax code 529. These plans allow you to save for your child's college education without having to pay taxes on the interest earned. Better yet, if all the monies in the plan are used for college expenses like tuition, books, room and board, etc., you will never pay taxes on the interest earned. That's the advantage, whenever you can (legally) avoid paying the taxes on interest earned on your money, the money grows at a faster rate because your real rate of return is higher. Just take a look at your savings or CD 1099 statements that you receive from your bank. The interest earned on your bank accounts is taxable and depending on your tax bracket then you might not be taking home much after paying those taxes.
Here is what I suggest:
- Set up a minor savings account (UTMA) for your child so that you can teach them to make deposits and get them into the habit of saving. Some banks still offer the passbooks for these types of accounts so the child physically sees their balance grow after each deposit. These accounts are typically free and do not require minimum balances. Gifts from birthdays, holidays, christenings, etc., can be deposited into this bank account.
- Open a 529 plan and make monthly contributions via direct debit from the savings account you have set up for your child. Additional contributions can be done at any time. Keep in mind that there are different types of investment options with the 529 plans, some riskier than others. Check the fund's performance when making a selection. You can also choose a fund that is automatically invested and shifted based on the child's age so the investments becomes more conservative the closer they get to college.
Ok, so these are two very different ways to save for your child. With the first option, when your child turns the age of majority, he or she is entitled to the money and is now sole owner of the account. With the 529, you remain in control until the money is ready to be used, regardless of the child's age. If the funds are not used for college than you pay a fee and you also pay taxes.
I have included a link that explains in detail the 529 savings plan, this one is offered by Alliance Bernstein Investments. Always consult your tax advisor to find out how much you can contribute to 529's.
4 comments:
Is it true that 529's are transferable to myself or to anyone else?
Can anyone open a 529 for someone else's kids?
Go Frugal, you can change the beneficiary on the 529's, for example if you open the 529 in one child's name but that child decides he or she does not want to attend college; then you can transfer it to another child or beneficiary. You as the custodian always remain in control of the money.
San Cyber, that is correct; anyone can open a 529 for a child, it does not have to be your own child. Many grandparents open 529's and have their grandkids as beneficiaries. There are no requirements that I know of that prevent people other than the child's parents to open the accounts.
Hope this helps. Thanks!
Do you need the child's ss or just the name? Are these accounts have any tax liability?
Thanks!
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