Saving for college

[mylilmonkeys]

I hope someone with some investment/tax experience can help me.  My son (14yo) has been working this past year and I want to invest his earnings somewhere that will net him a decent return.  However, I'm concerned that I might have to claim his earnings on my taxes and really don't want to hassle with that.  He's been shoveling snow and mowing lawns and he won't be getting tax documents, and is under the cap for filing anyway.  I've been looking at possibly a Coverdell, because it is the property of the student whose name is on the account, rather than a 529 which becomes the property of the parents and can be transferred, etc. etc.  Are there any details that I should know ahead of time before opening an account for him?  

[sewaneecook]

I don't have a lot of tax or investing experience, but I can tell you what we decided to do.  We opened a 529 because the one in our state has tax benefits for us and specifically because it isn't in the child's name.  I would never use that money that is my child's, but when it comes to colleges, they expect the student to use ALL their savings, but only a smaller portion of the parent's savings (and may help when it comes to financial aid).  If our children decide not to go to college (they are only 2 and 5), the money can be taken out of the accounts with a small penalty and some taxes owed, but overall would still have been a decently wise investment. 

Most investments that you would put the money in for just the 4 years until your son starts college would likely not make more than about 10%.  All college specific accounts that I looked in to invest similarly to retirement accounts where the closer it is to using the money, the less risky and usually less interest the investment makes.

As far as taxes go, if he earned the money, he owes the taxes.  Whether its on your tax forms or filed in his name (which if he made a fairly small amount he probably won't owe much).  My first filing was when I was 13 and only made $500. 

[velochic]

He's exempt from taxes.  You don't have to claim them either.

With a Coverdell, for me, the biggest con is that there is a contribution limit of $2000 per year, whereas with a 529, the contributions are (for all intents and purposes) unlimited.  That is, even if you wanted to help out and give him more money to invest, with a Coverdell, the limit, no matter how many people are helping, is only $2000/yr.

Another con is that when a child turns 18, the parent has no say-so over what is done with the money.  So, say your child turns 18 half way through his/her senior year in high school and decides to use the money to go to Aruba on Spring Break with friends... you can't stop them.  The money is theirs to do whatever they want with.  With a 529, the parents retains control.

You ask if there are details you should know before opening an account... yes, all of the them.  You should not be investing money unless you fully understand what you are doing.  Your local library will probably have plenty of books you (and your son) should be reading if you are planning to invest in any way.

TBH, right now doesn't seem a good time to be investing if you are going to be pulling the money out in just 4 short years.  Investing should be a long-term plan... especially with the way the economy is going right now.  I am not confident that the markets will stabilize even in 4 years!  If I were *just now* starting to save for college, I would look for FDIC insured savings vehicles, such as CDs and Money Markets.  That's just my 2 cents and of course every financial situation is different and needs to be evaluated with all the facts in mind... something only you can do.  Good luck!!

[mylilmonkeys]

I looked at CDs and Money-Markets and it doesn't look like rates will be much better than his current savings account.  10% or even 6% would be a much bigger return.  I know there's not a lot of time, but it's worth doing what we can with the time we have.  He's going to have to fund his education one way or another.  He's hoping and working very hard toward a football scholarship, but we can't bank on that one.

[K1329]

http://www.finaid.org/savings/529plans.phtml#Impact%20on%20Financial%20Aid

Here is a link with info on the effect of 529 plans on financial aid eligibilty. There's also a section on maximizing your eligibility for need based financial aid.

[velochic]

Originally Posted by mylilmonkeys 

I looked at CDs and Money-Markets and it doesn't look like rates will be much better than his current savings account.  10% or even 6% would be a much bigger return.  I know there's not a lot of time, but it's worth doing what we can with the time we have.  He's going to have to fund his education one way or another.  He's hoping and working very hard toward a football scholarship, but we can't bank on that one.

You're not going to get that kind of return.  That's pie-in-the-sky wishful thinking.  Even in GREAT economic times, a consistent annualized return of 6% was doing quite well.  There is nothing safe right now except FDIC insured savings vehicles. "Doing what you can" would be simply hedging a little against inflation over the next 4 years.  Realized returns?  It's not going to happen in 4 years, and I'd place even odds that he'll be much worse off in 4 years (that is, lose money).  Everybody's investments are down and they're not going to bounce back anytime soon.  In large part, that's due to the horrific volatility the past 3 years, and I honestly do not believe the economy will pull out of this slump before your son is heading off to college.  At this point, I would say that investing in the stock market, starting just now and being in for only 4 years before the funds are needed, is no different than going to Las Vegas (and the house always wins).  Please do some research.  You'll learn that investing in the stock market is a long-term financial plan, not something people do when they need the money in 4 years.  That's just serious fiscal folly.  Good luck however you decide to proceed.  (A good place to start reading to get a dose of reality is Paul Krugman's OP-ED column in the New York Times.)

[zebra15]

Right on... as usual
 

Originally Posted by velochic 

You're not going to get that kind of return.  That's pie-in-the-sky wishful thinking.  Even in GREAT economic times, a consistent annualized return of 6% was doing quite well.  There is nothing safe right now except FDIC insured savings vehicles. "Doing what you can" would be simply hedging a little against inflation over the next 4 years.  Realized returns?  It's not going to happen in 4 years, and I'd place even odds that he'll be much worse off in 4 years (that is, lose money).  Everybody's investments are down and they're not going to bounce back anytime soon.  In large part, that's due to the horrific volatility the past 3 years, and I honestly do not believe the economy will pull out of this slump before your son is heading off to college.  At this point, I would say that investing in the stock market, starting just now and being in for only 4 years before the funds are needed, is no different than going to Las Vegas (and the house always wins).  Please do some research.  You'll learn that investing in the stock market is a long-term financial plan, not something people do when they need the money in 4 years.  That's just serious fiscal folly.  Good luck however you decide to proceed.  (A good place to start reading to get a dose of reality is Paul Krugman's OP-ED column in the New York Times.)