Alternatives to 529

[Vishenka69]

Both sets of grandparents gave DD money for her birthday. We'd like to put them away for her but not sure where. We're already maxing out 529. We can always have 3 different 529 plans but I was wondering if there are any alternatives out there. It's not nearly enough for a full blown trust fund and I'm assuming there'll be cash to add every birthday.

[Deebs]

What about an IRA? Not a Roth (I'm sure you don't qualify ), but a traditional IRA? Does she have a basic savings account yet? When I was school aged, my parents taught me how to use a savings account, and it had already been started for me, which was nice and I think really taught me how to save.

[MissCrabette]

How about a Coverdell account? It has a pretty low yearly maximum contribution unfortunately. Or maybe a UGMA or UTMA account. You might want to discuss this with a financial planner who better understands not only the tax implications but also the way these accounts are looked at when applying for financial aid.

Other than that, I'll also second the suggestion of a savings account. My grandparents did that for me early on and it encouraged me to save.

[Sheherezade]

I think the rules for Roths have changed - at least the limit on income was gone last year. I'm not sure if that reverted or if it will do so in the future. I know my father transferred a bunch of savings in to Roth to pay the taxes up front and he never qualified previously. I need to look in to that myself....

[Tenacious_D]

We have a UTMA savings account for both boys and also some of the money in bonds (sadly they have more in their savings than we ever have in our checking!). We may change to something different if we feel they are accruing enough to do so.

[Vishenka69]

Thanks. I think I like the Coverdell options the most. Primarily because it will limit grandparents to only $2000 a year. I'd rather they put away for their own retirement. What are the advantages of opening an IRA for her? She's only 1, so I think it's a bit early for her to have a savings account, but I definitely plan on opening one for her later. ING has a special child-friendly site for their kiddie savings accounts, if it's still around in a few years, we'll probably take that route.

[DCJenn]

My parents have a 529s for each of the boys (3 of them.)

Jenn

[Sheherezade]

I believe the Roth allows you to take out money for education. (Hence the reason it is recommended for college savings often.) Also, with a Roth, taxes are paid up front. Money taken out at a later date is tax free. Considering most people think that taxes will be going up, that's an advantage over some other options. That's all I know about the IRA reasoning.

I know this is older, but I'm a financial advisor, so I feel I could contribute, if anyone has questions in the future.

First of all, Muni Zeroes (Tax free municipal Zero-coupon bonds) are an option I always use for my clients in education savings. For example, if I have a client with a four year old, I will buy a 12-13 year muni zero. It will mature right as they hit car or college age, they will know exactly what it will be worth, and all the earnings will be tax-free. Sometimes we even stagger them, if we're dealing with larger dollar amounts to have them maturing each year. They mature at $5000, and normally you'll pay $2000-$3000 for them. It's a fantastic compliment to the 529, because you don't have the volatility.

Roth IRA's are great, but they are done in the parents name, and income limits will apply, so you most likely won't qualify. (The income limits were only lifted for conversions in 2010, not for contributions.) The benefit of the Roth is that all CONTRIBUTIONS can be withdrawn tax-free, even before age 59 1/2. Only earnings would be taxed if you accessed them. Since the roth is already taxed, though, you aren't getting the benefits of tax-free growth that you do from the 529. (BTW, there are no limits on the 529, unless the specific plan you are going through sets them. I'm not familiar with that. There is just gift tax to consider.)

One huge benefit of the Coverdell is they can be used for private school for k-12. Again, there are income restricitions, but this is fantastic for the grandparents. Plus, the investment options are much more flexible.