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Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 8138  
Subject: Re: Baby soon to be born, start saving for colle Date: 4/13/2009 12:27 PM
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My wife and I are having a baby perty soon and I have been thinking about starting a college fund now. I would like some advice on where to invest. Is there a College fund that is tax free on withdrawal like the Roth IRA? Maybe something called the "Roth EDU?" :) I am going to only put a little bit each month in there to begin with, but it will add up in 18 years, and hopefully pay for the whole deal... we've also thought, maybe it'd be better to save in just a few ETF's like VWO or VTI and just let it grow in there overtime in case he/she decides to do a trade and purchase a home or another investment.


There are several options. There is the Coverdell account which is capped on contributions similar to an IRA, and I think you can only put in $2000 per child per year. The disadvantage is that you are limited on the contribution amount, but the advantage is that you can invest in anything you want. I don't know the tax implications of these as I have not used this particular tool.

Then there are 529 plans. In some states, you can get a tax deduction on any contributions you put into the plan. There are no taxes on the earnings, but these are typically investments, and can go up and down as can whatever investments you put into the Coverdell. You name a beneficiary for this account, so you generally have one per child, but if you have space between your children, you could have one, use it for the first child, and then change the beneficiary to the 2nd child. I use this for my kids, but have only put a very minimal amount in as I have twins, so I will be using all the funds at the same time. I also don't care for the choices in some of the 529's, and I don't care for the fact that you can only use this money for education expenses. I prefer more flexibility than that.

You can also save money in your own taxable account. This is where I have put the bulk of my kids' college savings as I wanted the flexibility to use the money on anything I wanted, and didn't know if both kids would go to college. I also didn't want to have to spend the same amount on each child and prefer to spend to their need level.

I will say that starting to save now is the best thing you can do. I did that with my kids where I put in something like $25 a week in the beginning into a taxable account [none of the college things above existed when I started to save]. I increased that every year with money that got reallocated. For instance, when I stopped buying diapers, I put that money into college savings. The biggest hit I got was when they stopped needing full time daycare, and I went from spending $400 a week to spending $400 a month on daycare. In that case, I actually split the savings with half going to their college fund, and half to our retirement.

My kids are now 18, and will be starting college in the fall. I have saved enough to pay for their college in full, and they are not eligible for need-based aid, even with both kids in school, but I already knew that I made too much in income to have expected any help there. Something that I did and that I highly recommend is to move the college money out of investments and into cash starting in the freshman year of high school, so in my case, I had moved everything to cash by the time the market tanked. The only thing I didn't do was to move their 529 money to something conservative, so that is way down, but it is very little anyhow, so I'm not concerned about it.

If you start now, push any savings from their expenses that go away towards college [i.e. formula, diapers, daycare, etc.], and remember to adjust your investments to cash as you get within 3-5 years of needing it, I'd bet you'll have everything you need to send your child(ren) to college when the time comes.
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