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So my wife and I will be having our first child at the end of the year, and I'm trying to devise a strategy for things like putting money away for the little person now, while I have the time and sleep in me to think about such things.

What are some good strategies to use to save money to give to a kid? College is obviously a big thing, but not necessarily the only thing I want to save for. My goal would be to have a respectable college fund to pay for a state college in 2029 and some money for general purposes. (Hopefully a car, trip or downpayment on a home and not beer)

Any ideas? I'm not opposed to 529 plans, but I don't necessarily want to tie all money up in one either. I'm also not concerned about colleges looking at assets in the child's name for financial aid purposes. (We're talking about 2029 or 2030 anyway, so it's unlikely that advice about that today would be valid that far out)

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It might help to mention how much money you intend to save for your kids college education. –  stoj May 18 '11 at 4:55
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College in 2029? Bah, it'll be online or some other major difference. That's what I'm banking on :) –  Andy Wiesendanger May 18 '11 at 15:42
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@stoj For the first couple if years I'm probably looking at $1,000 to $2,000 in annual savings. That's a big range that depends on a bunch of other potential expenses that I'm not sure of yet. We may be single income for a few years. –  duffbeer703 May 18 '11 at 16:38

5 Answers 5

Saving for college you have a couple of options.

529 plans are probably the best bet for most people wanting to save for their kids college education. You can put a lot of money away ~$300k and you may get a state tax deduction. The downside is if you're kid doesn't go to college you may end up eating the 10% penalty.

State specific prepaid tuition plans. The upside is you know roughly the return you are going to get on your money. The downside is your kid has to go to a state school in the state you prepaid or there are likely withdrawal penalties. For the most part these really aren't that great of a deal any more.

ESAs are also an option but they only allow you to contribute $2k/year, but you have more investment options than with the 529 plans.

Traditional and ROTH IRA accounts can also be used to pay for higher education. I wouldn't recommend this route in general but if you maxed out your 401k and weren't using your IRA contribution limits you could put extra money here and get more or really different flexibility than you can with a 529 account. I doubt IRA's will ever be asked for on a FAFSA which might be helpful.

Another option is to save the money in a regular brokerage account. You would have more flexibility, but lower returns after taxes. One advantage to this route is if you think your kid might be borderline for financial aid a year or two before he starts college you could move this money into another investment that doesn't matter for financial aid purposes.

A few words of caution, make sure you save for retirement before saving for your kids college. He can always get loans to pay for school but no one is going to give you a loan to pay for your retirement. Also be cautious with the amount of money you give your adult child, studies have shown that the more money that parents give their adult children the less successful they are compared to their peers.

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Your last paragraph is especially true, and follows all financial advice I have seen on the topic. You can borrow for college. You can't borrow for retirement. So, make sure your retirement is fully-funded first. –  msemack May 18 '11 at 13:32
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Agreed. My plan is to continue my current discretionary retirement contributions (about 13% of income) and I'm a vested participant in a secure defined-benefit pension as well. I didn't think of the potential of shifting an investment to improve financial aid prospects later! –  duffbeer703 May 18 '11 at 16:32

(Congratulations on the little one on the way.)

I'd recommend saving outside of tax-advantaged accounts. Pay your taxes and be done with them.

I'd recommend putting your old-age fund first before shelling out a lot of money for college.

I'd recommend not shelling out a lot of money for college. Ideally, none. There are ways today to get a four-year degree for $15,000. Not $15,000 per year. $15,000 total. Check here. (This isn't an affiliate link.) They can pay for this themselves!

I'd recommend making sure you hold the hammer. Don't let them party on your nickel.

I'd recommend teaching your kids to "fish" as soon as possible. Help them start a business. They could be millionaires by the time they're teenagers. Then they can make their own money. You won't have to give them a dime.

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FYI the "lowestcostcolleges.com" website appears to be no more. –  blunders Jul 20 '12 at 2:43

Being in the same situation, and considering that money doesn't need to be available until 2025, I just buy stocks. I plan to progressively switch to safer options as time passes.

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Saving for school is [fundamentally] no different than saving for any other major purchase: in addition to some of the great answers already provided, here are a couple other thoughts:

  • if either you or your spouse will be the right age in 2029, drawing from an IRA may be possible fee-free (ie if you're over 59½ in 2029)
  • find some mutual funds you like the looks of (no- or low-fee ones abound with reasonable historic and projected returns)
    • Fidelity, as one example, offers "target" mutual funds, where the target date is the expected retirement year; if you pick a 2030 account, for example, it will be gradually shifted into more stable investments as it ages, becoming less and less risky as your target year approaches
  • if you're familiar with one or more industries, invest in some companies you understand
  • keep some in a liquid account such as a traditional savings or money market account
  • save frequently - putting $20 a week into an account is a LOT easier than $1040 at the end of the year!

Just to have the [simplified] numbers handy:

$1000/yr @ 6%  : $34,338 in 18 years
$1000/yr @ 12% : $68,335 in 18 years

If you can increase that to $2000/yr, after 18 years:

@6% - $68,676
@12% - $136,670

One final thought - I would personally avoid the 529 plans because if your child decides to not go to school (eg goes in the Coast Guard, decides to be a farmer, enters the Peace Corps, etc), you're penalized on withdrawal, whereas with any other savings/investment methodology, you won't have those penalties.

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Others have given some good answers.

I'd just like to chime in with one more option: treasury I-series bonds. They're linked to an inflation component, so they won't lose value (in theory). You can file tax returns for your children "paying" taxes (usually 0) on the interest while they're minors, so they appreciate tax-free until they're 18. Some of my relatives have given my children money, and I've invested it this way.

Alternatively, you can buy the I-bonds in your own name. Then if you cash them out for your kids' education, the interest is tax-free; but if you cash them out for your own use, you do have to pay taxes on the interest.

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Not a super productive investment right now. treasurydirect.gov/indiv/research/indepth/ibonds/… –  MrChrister May 24 '11 at 20:15
    
Correct; the fixed rate component is 0 - has been for a while, and will be for a while. But it's a safe investment, and (currently) pays a lot more than any other safe holding like a savings account. –  Stephen Cleary May 24 '11 at 20:42
    
I agree it is safe, but bankrate.com shows me 14 banks offering at least 1% interest on savings accounts. I know bonds might go up in the future, but you could always pull money out of those savings accounts when bonds actually have a return. –  MrChrister May 24 '11 at 21:33
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Even with a fixed rate of 0%, the composite rate on I-bonds is still 4.6%. They are a little less fluid than bank accounts but not terribly so: you have to hold them for 1 year and pay a slight penalty (3 months interest) if held less than 5 years. –  Stephen Cleary May 24 '11 at 21:45
    
>You can file tax returns for your children "paying" taxes Be aware that this means the children own the money in a Uniform Gifts to Minors Account (UGMA) of which you are the custodian, and when the children turn 18, they can take over the account and blow it all on whatever they please. This can end up being penny-wise and pound-foolish. –  Dilip Sarwate Mar 26 '12 at 15:55

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