I know most of you don't have kids, but hopefully there are enough finance nerds on here to give some guidance.

I can't decide whether or not to go with a Coverdell ESA or a 529 savings plan for my daughter (or possibly 529 pre paid tuition). I'm attracted to the Coverdell because it allows me to choose the allocations of investments (so I can likely get greater return than the 529, particularly since I have 18 years and can afford to be more aggressive).

does anyone want to make a case for 529s?

are there any noteworthy limitations on transferring the money from a Coverdell to a 529 later on?

9/28/2006 7:06:58 PM

Evidently the Wizards of Law, a.k.a. your legislators, have some spell which prevents me from being able to share an answer with you for fear I may interfere with their magic.

9/28/2006 8:48:00 PM

Coverdell
+
Can be used for elementary & secondary education as well as college, so it's an advantage if you want to put her in a private or parochial school
More investment flexibility
-
Annual contribution limit is only $2000. Compounding even at a very-aggressive 10%, that's only a bit under 100K by the time she's 18 and you can't contribute anymore - with tuition increasing 6-7% a year, a Coverdell alone won't cut it if you plan to pay for all of her school.
Non-deductible
Considered an asset of the student, which means the FAFSA views 35% of this money as available to pay for school when determining the EFC
Your kid gets control of the account at age 18.
Must use funds by age 30.

529 Savings Plan
+
May be deductible if you live in the state whose 529 Plan you're participating in
Considered an asset of the owner, usually the parent, which means the FAFSA-determined EFC will only look at 6% (can't remember the exact number, but much parents' assets are not assessed as harshly as the student's) as available to pay for school; a bonus if you can only save some portion of the cost of school
You keep control of the account
Contribution limits are higher, like 100-300K lifetime, depending upon the state
-
If Congress doesn't pass a law extending these, the tax advantages will disappear in 2011 and the distributions will count as income to the student
Less investment flexibility - like a 401k, you choose from a limited pool of investment options from the financial services company operating the plan. Can change investments 1x/year

529 Prepaid Tuition
-
Reduces financial aid dollar-for-dollar. I guess it's not a problem if you think you can save the full amount for 4-5 years. For the rest of us, what's the point of saving if it simply reduces your grants and not your loans?

*****
I'd advocate for the 529 Savings Plan for most people
--because I can't imagine any re-election seeking member of Congress voting against making the 529 Plan a permanent part of the tax code, as they did with Roth IRAs recently.
--because of higher contribution limits
--because of possible tax-deductibility
--because you retain control over the account
--because if you can't save the full cost of college, it has less impact to your daughter's financial aid package than the Coverdell

But since you want to go balls-out and save aggressively, here's my suggestion:
1) Put your 2K/year into the Coverdell. Use this for your small-caps, emerging markets, and other things not typically found in a managed plan. You'll have the flexibility to use these funds to put her into a private high school, if that is important to you --- or to her --- later on
2) Put additional funds into the 529 Savings Plan. Think of this like the 401k/403b at work, and focus on low-cost funds. You have less investment flexibility, but you retain control if your kid decides to empty the Coverdell account to buy a convertible and party with her boyfriend in NYC til the money's gone. Or, you can use it if you choose to go back to school, or you've got another kid later on who wants to go to school too. Or if there's medical or graduate school - since the Coverdell must be used by age 30, the 529 can cover an MBA program entered into after a few years of working. Or if she's super smart, gets a full scholarship, and you want to use the money for someone else's education.

If you want to do everything for her:
1) Coverdell, 2000/year
2) 529 Savings
3) Whenever she gets her first job, open a Roth IRA in her name and either "match" her contributions with yours to teach her the concept of 401k's and employer matching, or go further and put in the lesser amount of her summer-job earnings or the annual limit. *As far as I know* they don't look at retirement savings when calculating aid, etc., and she'd have a head start on saving for retirement and her first home.

If you still have more money after doing all of that, you're welcome to pay for my graduate school

10/1/2006 5:12:12 PM

bttt

1/26/2007 1:06:44 PM

so since i'm a FL resident and pay no state income tax (and thus stand to gain nothing in terms of tax advantages by using a 529), and plan to invest <$2k/year, can anyone give me any reason that I shouldn't use a Coverdell, then transfer it to a 529 sometime before her junior year in HS for financial aid purposes (and to make sure my daughter can't use the money for a new sports car and 3 month vacation)?

only issue is that there's no way to have joint ownership of either of these plans, so baby's mama would either have to contribute to a plan that I have full ownership of (don't know if she'd be comfortable with that...she has nothing to worry about, but I know I wouldn't do it), or I could do all of the funding our daughter's college in exchange for less child support liability. any other ideas on how to handle this, please speak up.

[Edited on January 26, 2007 at 2:18 PM. Reason : asdfasd]

1/26/2007 2:00:32 PM

Quote :

"(so I can likely get greater return than the 529, particularly since I have 18 years and can afford to be more aggressive)."

that plan isn't going to work out. if that's your decisioning, just stick to a 529 - i'm pretty sure they come in age/risk self-adjusting flavors like mutual funds so you won't screw it up

1/26/2007 8:54:27 PM

for some reason, I don't think you can do an ESA-to-529 conversion, but I would call a college savings specialist to ask about that. I think the ESA, since it'd be considered her money for college aid purposes, probably is considered her money - period - meaning you wouldn't be able to convert it over to the 529 when she's in high school.

you and baby's mama can contribute to separate accounts for the same beneficiary, if the account ownership would be problematic. If you want "less child support liability", get a lawyer to draft documentation & get that notarized. Otherwise, you could end up paying for all the college funds and still be liable for full child support fees.

I've got my 529 plan w/ Virginia, because they had funds I was already comfortable using. Plus, if I can talk my parents into helping me save for grad school, they can get a pretty sweet tax deduction.

1/27/2007 12:50:00 AM

Quote :

"Forgetting what's most important: retirement savings Once you're faced with the monumental task of saving for your child's college tuition, it's easy to shrug off saving for retirement. Big mistake, Ballou says. "Saving for retirement always comes first, college comes second," Ballou says. "You and your child can figure out other ways of getting through school. It would be worse if your child had to support you during your retirement." Max out on your 401(k), an IRA, or whatever retirement plans are available to you. Stay-at-home spouses should sock cash into an IRA. Of these, look into a Roth IRA. These take after-tax dollars. Earnings inside the account build up tax-free, and, later on, you can withdraw money without incurring taxes. Read more about retirement planning on MSN Money."

http://articles.moneycentral.msn.com/CollegeAndFamily/RaiseKids/NewParentsTop10MoneyMistakes.aspx

1/27/2007 12:59:41 AM