fund for grandson
Editor's note: The Pension Protection
Act of 2006 signed into law by President Bush on
Aug. 17, 2006 removes the 2010 expiration of the
529 tax exemption. Withdrawals from a 529 plan will
continue to be completely tax-free when used for
I would like to start a college fund for my grandson, who is 8.
What would you recommend: bonds, a savings account in his name;
etc. etc? I want to be sure it is secured for his education. Thank
-- Cordella Collegiate
I think you should choose a Coverdell Education
Savings Account, or CESA, a section 529 college savings plan, or
a section 529 prepaid tuition plan. All three types of college savings
accounts offer tax advantages when investing for college.
Start out by deciding whether you'll
be investing a lump sum, contributing over time or both. An automatic
investment plan can make it easy to set aside money on a regular
The Coverdell Education Savings
account is limited to a total contribution of $2,000 per year, per
beneficiary. There are some modified adjusted gross income, or MAGI,
limits on the contributor, from IRS Publication 970, Tax
Benefits for Education.
If your modified adjusted gross
income is less than $110,000, or $220,000 if filing a joint return,
you may be able to establish a Coverdell ESA to finance the qualified
education expenses of a designated beneficiary. For most taxpayers,
MAGI is the adjusted-gross income as figured on their federal income
You can open a CESA account with
a mutual fund, a brokerage firm or a bank. You'll have your choice
of investing in stocks, bonds, money market instruments or certificates
of deposit. Keep an eye on the sales loads, annual fees and expenses
along with the risk associated with each investment. In general,
you'll want to become more conservative with the investments as
it gets closer to his matriculation date.
Section 529 plans come in two flavors,
prepaid tuition plans and college savings plans. You don't have to use the plans
offered by your grandson's (or your) state of residence, but there can be important
tax advantages in using plans offered by his (or your) state.
The NASD provides an excellent
overview of the different approaches to college savings in: Smart
Saving for College - Better Buy Degrees 529 Plans and Other College
Savings Options. It includes a warning about the sunset provisions
in the current law excerpted below:
Caution! The law exempting qualified
withdrawals from federal income tax expires on Dec. 31, 2010.
Unless Congress and the president take action to extend the provisions
of this law, withdrawals from 529 plans will not be tax-free beginning
in 2011. Keep this in mind if you have younger children who will
be in college after 2010.
Since the sunset provision is only
four and a half years away and your grandson's matriculation date
is nine to 10 years away, changing tax laws will influence the tax
advantages of the account. A CESA account isn't subject to the sunset
The NASD guide also has a Section
529 expense analyzer that can help you estimate the expenses
associated with a Section 529 account and what to look for in a
You have more investment options
with a Coverdell Education Savings Account, but it won't come with
the guarantees of a prepaid tuition plan or the contribution potential
of a section 529 account. Talk to the boy's parents about their
plans for his college savings since any contributions they make
into a CESA reduces your ability to contribute funds.
Finally, in reviewing section 529
plans you should work your way through Bankrate's 529
savings-plan estimator and savingforcollege.com's
College Costs 101, 201 and 301. You'll get a real education and
have the ability to review the programs offered by the states.
You also should take a look at the multiple
college financing stories available on Bankrate.