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I have some gifts from friends and family for my newborn daughter. I would like to invest these but I don't know what is the best way. 529 plans spring to mind but I don't know what the educational atmosphere will be in 18 yeas (Will the idea that every person needs to go to college fizzle out? Will the rate of tuition increases continue?). Should I go with the 529 anyway or aim for a more flexible option? If I go with something else, would it be wise to go high risk since this money is not for a short term need or should I go with stable since it is not my money to gamble with?

For reference, I am located in PA, USA.

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    I would search for something more generic than a 529, such as a dividend-based passive income or something else. – ashes999 Feb 19 '12 at 21:29
  • This may not apply to you specifically, but remember that an excellent investment for one's children is to ensure that one's own financial situation is stable! Before investing in a 529 etc, make sure you're not setting your kids up to have to worry about their parents' finances in addition to their own. – Steven Feb 20 '12 at 16:12
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There are two types of 529 programs.

One where you put money aside each month. The one offered by your state may give you a tax break on you deposits. You can pick the one from any state, if you like their options better. During the next 18 years the focus the investment changes from risky to less risky to no risk. This happens automatically. The money can be used for tuition, room, board, books, fees.

The 2nd type of 529 is also offered by a state but it is geared for a big lump sum payment when the child is young. This will cover full tuition and fees (not room and board, or books) at a state school. The deal is not as great if they child wants to go out of state, or you move, or they want to go to a private school. You don't lose everything, but you will have to make up the shortfall at the last minute.

There are provisions for scholarship money. If you kid goes to West Point you haven't wasted the money in the 529. The money in either plan is ignored while calculating financial aid.

Other options such as the Coverdell Education Savings account also exist. But they don't have the options and state tax breaks. Accounts in the child's name can impact the amount of financial aid offered, plus they could decide to spend the money on a car.

The automatic investment shift for most of the state 529 plans does cover your question of how much risk to take. There are also ways to transfer the money to other siblings if one decides not to go to college. Keep in mind that the funds don't have to be spent as soon as they turn 18, they can wait a few years before enrolling in college.

  • Thank you for all this information but I was really looking for weighing 529 plans against other avenues for investment. Still, this does give me some info I didn't know so everything is good. – Bob Roberts Feb 20 '12 at 0:12
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    I thought I covered everything you asked (High risk vs stable). flexibility. The 529 has a tax break on deposit, when it is spent on qualified expenses, and it doesn't impact financial aid. I am not sure there is anything else that compares to it. – mhoran_psprep Feb 20 '12 at 4:03
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    As an additional feature, the money does not have to be spent on your child if, God forbid, something happens to the child, or 18 years from now the child decides against going to college, or you decide to not waste the money sending the child to college. The money can be withdrawn tax-free as long as it is spent on the education of someone, whether it be a younger sibling, a niece or nephew, or some kid in the neighborhood, or even a total stranger, e.g. you can, in essence, have four-year scholarship awards in your name at the local college, and be known as a benefactor. – Dilip Sarwate Feb 20 '12 at 4:15

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