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I'm 44 years old and the proud father of a 7-week-old little girl, and I just started doing some preliminary research into 529 plans. From what I've been able to gather so far, since just about all of these state-sponsored plans use underlying mutual funds as their investment component, why shouldn't I just open a ROTH IRA and park the money there for 17, 18 years? Here's my reasoning:

1. I live in California and there is no state income tax credit for anyone living here and applying to an in-state program.

2. Most state programs actually have more costs associated with their programs - account opening, custodial, management, etc. - than the single expense ratio associated with a particular mutual fund (since I already have more than 50K in my other Vanguard IRAs, the $10 annual service fee would more than likely be waived).

3. College Savings Plans have restrictions on what the money can be used for ("qualified education expenses"). Not so the ROTH.

4. The money will be available for me to withdraw after I become 59 1/2, at which point my daughter will only be 15 and not yet ready for college. Point is, when she is ready, the money will be there for us to take out and use for whatever college expenses are needed, tax-free, without any restrictions.

5. I don't have to worry about "What if my child decides not to go to college?" and have to deal with the consequences of how to allocate all that accumulated money by then.

6. I will have control of the investments, and a greater selection to choose from at that.


Am I missing something here? I'm really interested to know why, given the points I've raised, it would still make more sense to invest in either a 529 or Coverdell Education plan? Any advice would be most appreciated.

Paul (fairly new member)
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The concern with using a Roth for college funding is that you actually have sufficent funds in other places for retirement and that $4K a year will be enough for the college funding you want to do.

Otherwise, it's not a bad plan.

rad
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Its a good plan. But after you max out your Roth you might want a 529 in addition.

I did some calculations 16 yrs ago when my daughter was born and at the time (pre-529) I concluded that it was better to fully fund a 401K and/or IRA than to save elsewhere for college. Then, if needed, take the money out early and pay the penalty. (This applied for only money that would compound tax free for at least 8-10 years, IIRC).

Mike
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"The concern with using a Roth for college funding is . . . that $4K a year will be enough for the college funding you want to do."

rad,

Good point. I had completely forgotten about the maximum yearly contribution limit. Thank you for bringing that to my attention. btw, isn't that limit increasing over the next couple of years, albeit modestly?

Paul
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Mike,

Thanks, too, for your input. As I mentioned to rad, clearly I had forgotten about the 4K ceiling. I'm glad to know that you both feel as if I've done my homework, however. I consider myself a novice at this stuff, at best.

Paul
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Your ceiling increases for you in 6 years (age 50) and the IRS seems to increase the ceiling even for under 50 every few years, so it could be quite a bit more. Plus, it's not like this money is sitting still, it's invested. Even assuming you put in $4,000 for 5 years and $5,000 for 12 more, that's $84,000 and assuming even 5% annual returns, that would be...ummm, compounding is not my strong suit. But it's a lot.

I had not even considered this idea, and I think it's a great one, assuming our esteemed congresspersons don't take the Roth away.

Great idea! Sounds like win-win to me.

Sock
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P.S. - the only fly in the ointment would be if your combined income increased to the point where you could no longer make Roth contributions.

Sock
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P.S. - the only fly in the ointment would be if your combined income increased to the point where you could no longer make Roth contributions.

Exactly! Then what!!

Dave Kone
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P.S. - the only fly in the ointment would be if your combined income increased to the point where you could no longer make Roth contributions.

Exactly! Then what!!


Start a Coverdell ESA - it's like an IRA, but if your income exceeds the limits, you can give the money to the child to deposit. At least, that's my understanding.
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Start a Coverdell ESA - it's like an IRA, but if your income exceeds the limits, you can give the money to the child to deposit. At least, that's my understanding.

Already there, but the annual limits are a joke..

thanks
Dave Kone
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Already there, but the annual limits are a joke..

Right! College on $2000 a year! I can see the kids 15-18 years from now saying, "what were they thinking" when college is $25,000+ for a public university.

But I did a little calculation and figured that with $2000 a year (assuming no increase in the allowable contribution) and about 6% return, there would be enough to fund 2 years of college. If I do better, then one or two more years. (And in the ESA I'm funding, of the total returns, about 1-2% is dividends, so I only need to achieve another 4-5% gain in the stocks. Of course, I'm striving for better returns...)
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Exactly! Then what!!


Start a Coverdell ESA - it's like an IRA, but if your income exceeds the limits, you can give the money to the child to deposit. At least, that's my understanding.


And when those limits are exhausted, simply save in a taxable account. I think sometimes people forget that just because there are limits to accounts such as college savings vehicles or retirement vehicles, there is always the option to simply save outside of those in a taxable account.

In the case of college, I find a taxable account to have lots of advantages particularly the flexibility to decide how much of those savings to use for college or to not use it for college at all and redirect it to retirement or the kid's wedding or some other thing.

I have twins, so my situation is a little different in that even in the cases where I can change the beneficiary, I'd be changing it to the other twin, but they'll be going to school at the same time. Plus, I don't honestly expect to spend the same dollar amount on each child, so for me, having the money in a taxable account under my name is my preferred choice so that I can decide what to spend on each child, if I should be spending it at all, and if the money ends up not being used because someone chooses not to go to college, I can reallocate that to other things of my choice.

It's interesting to me that I seem to find college planning and saving more challenging than retirement savings because of the options available, the twin issue, and my general leaning towards maximum flexibility and choices for spending my money.

Just more food for thought for others who are also trying to figure out the best way to save for college.
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In the case of college, I find a taxable account to have lots of advantages particularly the flexibility to decide how much of those savings to use for college or to not use it for college at all and redirect it to retirement or the kid's wedding or some other thing.

You can always gift stock up to the annual limit to your child after they pass the age limit(18 ? now) and probably owe little to nothing on the capital gains when they sell the stock. For kids with good financial upbringing, this can work well for paying for college with low taxes and full choice on investing options.

rad
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In the case of college, I find a taxable account to have lots of advantages particularly the flexibility to decide how much of those savings to use for college or to not use it for college at all and redirect it to retirement or the kid's wedding or some other thing.

Taxable accounts is where most of my money is for college.

Dave Kone
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You can always gift stock up to the annual limit to your child after they pass the age limit(18 ? now) and probably owe little to nothing on the capital gains when they sell the stock. For kids with good financial upbringing, this can work well for paying for college with low taxes and full choice on investing options.


That's a great idea, and one which I had not thought of. I can see where this may certainly come in handy for us for their college expenses, and will most likely make use of it.

Thanks!
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Wow! I had no idea that my original query for insight into what I was thinking might be a good alternative to the standard 529 Plans and Education Savings Accounts would have spawned so much good advice further down the road.

Thank you, one and all, for your contributions to the original post. Still being a fairly new member, I've learned so much from the regular contributors on these boards, and from those who have the time to "surf" across all boards.

I also realize that I should probably go back a little more frequently to a post I made and see if there have been additional comments/posts. I obviously mistakenly assumed that once a few days had passed, that would probably be the end of the replies (sockgirl, thanks for your input, too).

This is what I've found to be most beneficial to my membership in the MF Community (btw, I'm an Income Investor subscriber): advice you'd have to search long-and-hard for, and spend countless hours at, which someone who's in-the-know can offer up in a heartbeat. Great stuff.

Paul
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I also realize that I should probably go back a little more frequently to a post I made and see if there have been additional comments/posts. I obviously mistakenly assumed that once a few days had passed, that would probably be the end of the replies (sockgirl, thanks for your input, too).


There's an easy way to do this. Down at the bottom of the My Fool menu, there's a link for View Replies. If you click on that, you will see if there are new replies to any of your posts. I typically use that if I'm posting to a board I don't normally visit, though it won't help to find replies to posts not made by you in the thread of interest.
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"There's an easy way to do this. Down at the bottom of the My Fool menu, there's a link for View Replies. If you click on that, you will see if there are new replies to any of your posts."

Terrific, thanks! Learn somethin' new everyday . . .
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Hello everyone this is my first post and luckily I found a thread addressing an issue I have. I think the original poster was looking to open an IRA for his child, something that I was considering doing as well, but I called the IRS on yesterday and I was told that I can't contribute to an IRA for my daughter because she doesn't have earned income.

In my opinion I don't think that's true considering you can contribute to a spouse's IRA if they are unemployed (no earned income), but that's what I got from their help line.

Here's the question: 1. Should I start an roth IRA, 529, or taxable account for her? 2. If I open a taxable account in her name, does she get taxed?
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In my opinion I don't think that's true considering you can contribute to a spouse's IRA if they are unemployed (no earned income), but that's what I got from their help line.

It's true - believe it.

Here's the question: 1. Should I start an roth IRA, 529, or taxable account for her? 2. If I open a taxable account in her name, does she get taxed?

If it's for college, open a 529. They changed the kiddie tax laws very recently so a taxable account in her name is not nearly as attractive as it used to be.

As an alternative, you can keep money in your name and gift $12K or $24K from you and spouse of stocks to her each year after she turns 18 and have her sell it so it's taxed at her rate.

rad

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Gotalilstinker: "Hello everyone this is my first post and luckily I found a thread addressing an issue I have."

Welcome.

"I think the original poster was looking to open an IRA for his child, something that I was considering doing as well, but I called the IRS on yesterday and I was told that I can't contribute to an IRA for my daughter because she doesn't have earned income.

In my opinion I don't think that's true"


It would be true. In this case the IRS gave you the appropriate response.

"considering you can contribute to a spouse's IRA if they are unemployed (no earned income),"

But you file a joint return with your spouse, and the amount is still limited by the earned income of the working spouse.

"but that's what I got from their help line."

The IRS gave you the appropriate response to your question.

Regards, JAFO


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If it's for college, open a 529. They changed the kiddie tax laws very recently so a taxable account in her name is not nearly as attractive as it used to be.

What change???

thanks
Dave K
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What change???

http://www.fairmark.com/news/060510a-tipra.htm

kiddie tax now goes to 18, instead of 14.

rad
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rad, thanks.

I hope this does not interfere with coverdell account, I think not. Its ashame for those trying to save for any type of education to face this type of tax.

David
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Wow, on that site I read the following:

"Even though the tax is calculated at the parents' rate, it is still the child that owes the tax, not the parents."

When their born they take on taxes they can't even begin to understand or have a choice in the matter.

David
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I hope this does not interfere with coverdell account, I think not. Its ashame for those trying to save for any type of education to face this type of tax.

No, the main effect of this tax law change is for UTMA accounts, which render them practically worthless from a usability point of view. Coverdells and 529s are still fine vehicles for college savings.

Mark
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Hot Topic this week...

I am also researching how to start saving for my 1 year old son. Based on my research it appears that the Coverdell account appears to be the best bet for my situation. $2000 per year for 18 years at 10% return yields about $90k, assuming 5% inflation that comes to around $40k in todays dollars. Not bad. Wish I had $40k in the bank when I went to college.


California 529 plan looks pretty lousy, and I prefer to pick my own stocks. However, I can move the Coverdell money to a 529 when my son is 17 to control the funds, if needed.

--
whyohwhyoh
-already max 2 Roths and one 401k

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I have Coverdell accounts, and on-line brokerage accounts in our names for college savings.

We can't do the Roth thing! I know tough problem to have, but its annoying to not be able to take advantage due to income limits.

I avoid the 529s right now, they keep changing things. By the time I need it (kids age 4 & 6) a 529 plan might be next to worthless or not able to use the funds for where they decide to go. I also don't like being locked into certain funds within the 529 plans.

I wish they or someone could uncomplicate matters and have an investment account for college savings where you can invest in whatever you want.

Dave K
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"I wish they or someone could uncomplicate matters and have an investment account for college savings where you can invest in whatever you want."

Isn't that the definition of the Coverdell?
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Isn't that the definition of the Coverdell?


It is and somehow it doesn't seem right to have different limits on Coverdell contributions vs 529 contributions.

My personal theory is that the mutual fund/investment company lobbyists had more clout and got the increased limits for the 529 :)

Another theory(not mine) is that because Coverdells can be use pre-college,they somehow smack of vouchers so they will never have the limits increased.

rad
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Isn't that the definition of the Coverdell?

Sure is with a whooping $2000 a year limit! :) <- yes I'm being sarcastic, the limit is a joke if your really saving and trying to pay for 4 years worth of college.

Dave K
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With $2,000 a year, assuming a mere (and crappy) 10% return on your money for 18 years, that would be $115,000 in FUTURE dollars. You don't think that would be sufficient? (I have no idea - literally asking)
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With $2,000 a year, assuming a mere (and crappy) 10% return on your money for 18 years, that would be $115,000 in FUTURE dollars. You don't think that would be sufficient? (I have no idea - literally asking)

The new report is due out very soon but here's last year's report on college cost from The College Board :
http://collegeboard.com/prod_downloads/press/cost05/trends_college_pricing_05.pdf

If you are interested in a 3 year trend for different specific colleges, check here :
http://nces.ed.gov/ipeds/cool/


rad


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Wow...great resources...THANKS
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Here's another piece of info that you might be interested in :
http://www.usca.edu/doubleknot/palmetto.html

rad
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With $2,000 a year, assuming a mere (and crappy) 10% return on your money for 18 years, that would be $115,000 in FUTURE dollars. You don't think that would be sufficient? (I have no idea - literally asking)


It depends, that might be enough for a local community college 12 years from now, but a state college or private college will likely run about $250k for 4 years (total cost)..

Right now a Computer Science Degree at University of Maryland runs about $29k a year.

Dave K
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Correction, last message I meant $9k a year for tuition, not $29k...

Sorry!
David
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I'm not exactly sure how scholarships are calculated, but I do know they asked for how much money I had in 529's and Coverdell's, but not in my ROTH IRA or regular IRA.

One of the best ways to pay for college will be scholarships and FAFSA loans. By not having money in 529, you won't get penalized for having it. I like your plan of saving in the ROTH or regular IRA or even 401K and then using it discreetly as needed after obtaining the cheap FAFSA loans. [Assuming they'll still be there.] And if not, you haven't lost anything by going the ROTH/IRA route.


Just finishing up (2 yrs left) of putting 4 kids through college.

Dave I
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For what it's worth, I looked into a 529 at Fidelity where I have my existing accounts. I'm lucky enough to be past the Roth limit and be in a situation of a taxable account already 1/2 of what DD's college might be in 8 years. If I invest well over that time, and not have to tap it that much for other emergencies, it might keep pace with that goal. So instead of locking up $4K a year in a 529 that might pay for 1 year somewhere, and needing to keep track of another set of funds, I opted for keeping it together in the one taxable account and keeping the flexibility for emergencies, weddings & starting life. And managing the capital gains taxes down to 0 yearly, hopefully. I wish they'd designed a limit system that was based more on the reality of current college costs.

529s are much better than UGMAs, however, where once you set up the account the money is g-o-n-e to the offspring, nearly regardless of what happens.

FC


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Wow. After reading all of the various replies to this discussion I am not sure what I should do now. I started a 529 for my granddaughter July,2005 and I am trying to decide what to do for my new granddaughter (19 days old) whether I should do the same for her or not? After reading the replies I feel like maybe I should see about taking the money out of the 529 (if that is possible) and doing something different for both girls? Or should I do one thing for both together or seperate? My oldest granddaughter will be 2 yrs old in February,2007. Any advice from all of the wise advisors here?
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I have mulled the same issue for about a year...and also started a 529 for my now 2 yr old daughter about the same time you did.

Within the next month or so, I plan to close that 529 and move the funds into a Coverdell because of the increase in flexibility of choosing what I want to invest in.

I think I can outperform the relatively small advantage that the 529 has with the federal + state tax break by "going it alone" as it were...and probably by a wide margin.
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Within the next month or so, I plan to close that 529 and move the funds into a Coverdell because of the increase in flexibility of choosing what I want to invest in.

I can't find anything to verify it but I don't think you can do this without it being considered an unqualified distribution. You can move Coverdell money to a 529(but then can't change the 529 beneficiary) but I can't find anything that allows 529 --> Coverdell moves. Please post a link if you have one.

I personally enjoyed the investing freedom of the Coverdell but $2K a year wasn't going to do it for college savings and with the recent kiddie tax changes, the 529s are definitely an attractive tool.

rad
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are there any penalties when closing a 529? i would like to be prepared when (if) I choose to make a change as i know it is the responsibility of the "financial representative" to keep me in for the long run and so i am sure that i will be discouraged for reasons not obvious to me.
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are there any penalties when closing a 529?

Depends on the plan as to whether the account advisors charge an account closing fee.

Any distribution from a 529 is subject to tax and penalty if it's not used for approved educational purposes.
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I could be mistaken, but I don't think money in 401K or IRA accounts count against you when colleges are running your numbers for financial aid. So if you might qualify for financial aid you're probably better off maxing out your retirement accounts first to reduce the assets that they're allowed to consider when determining financial aid. If you have some left over then you might want to put some of that into a 529.
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