Best savings plan for baby as he grows up?

Question

Can anyone recommend a good savings plan to save for my baby's tuition when he grows up.

What is the best plan in terms of pre-tax savings, interest rate, bonus, return value?

Can you recommend any financial instituitions that offer a good plan in the US?

Answer 1

All States run plans out there called 529 plans where you deposit some amount per month and when the child is 18, you have the tuition saved up for the child to go to college. The problem with these plans is that they assume that the child is going to go to a state college or university. They also assume the child is going to go to college period.

So, what happens if your child just isn't college material? Or conversely, what if your child is a genius and wants to go to Harvard or Stanford? Your money is invested in a State plan and difficult to get out for some other purpose than going to the State University. There are usually some state tax advantages to investing in a 529. But check the plan documents carefully and know what you're investing in. Find out what happens if your child doesn't want to go to the State University when he's 18 or if he doesn't want to go to college at all.

Personally, I would set up a Custodian Account under the Uniform Gift to Minors Act with a good mutual fund. That way, the child can use the money for college or use it to buy a house but the money is there and can be used for what he needs.

I've attached some links below for you to read. You should be able to find info about the 529 plan in your state.

Answer 2

I agree with Jess, Joe, and Faye (except that I would disagree with Faye on one point - some 529 plans allow the cihld to go to any accredited college in any state). The one thing I'd like to add is that if the 529 plan you choose gives you a choice about how to invest the money, I think you should choose stocks. It's a long time (17 years) until the baby will use that money, and over long periods of time like that, stocks have consistently returned more than any other class of investment. They do go up and down along the way, which makes some people think they are "not safe", but for people with a long-term goal (like you have), they're the most profitable place to invest. So-called "safe" investments like bank accounts, CDs, money market accounts, etc. usually don't return enough to even keep up with college cost inflation, so you'll likely have to put a lot more into those kind of investments in order to end up with the same amount in 17 years.

Answer 3

If you are saving for college expenses, you should take advantage of federal tax breaks aimed at families saving and paying for college. These include the following:

Qualified Tuition Programs (529 plans)—Earnings grow tax-deferred and distributions are tax-free when used for qualified post-secondary education costs before 2011.

Coverdell Education Savings Accounts— Earnings grow tax-deferred and distributions are tax-free when used for qualified post-secondary education costs. May also be withdrawn tax-free for primary and secondary school expenses before 2011.

Most of these plans can be used at any college or university. Don't pick one that can only be used at state universities only. Plans that invest in bonds or money markets are the most stable. Plans that invest in stocks will earn more over the long run, but you will have a bumpy ride. Other plans invest in stocks early on, and slowly switch to safer bonds as your kids get older. I like the Utah plan, run by Vanguard, but your state 529 plan may have better tax benefits.

Putting money in a custodian account under the Uniform Gift to Minors Act, is another possibility, but this counts against your child more when calculating financial aid for your child. Also when your kid turns 18, (21 in some states) it his money. He may want to buy a sports car with part of it. You have more control over 529 plans.

If your child turns out not to be college material, or chooses not to go to college, you will have to pay a 10% penalty and pay income tax on the gain of the investment, if you want to withdraw the money. If you have several children, you can move money from one kid's 529 to the other, if one doesn't go to college.

You should consider investing first for your retirement. When your child is older, and you have a better idea whether he is going to college, you can switch over and fund his college more and your retirement less.



You can read about this at
http://www.savingforcollege.com/

Answer 4

Check out the 529 College Savings Plans. They are usually pre-tax.