Time for some reader input! Here’s a question from Jaynee. She and her husband have been doing a great job saving money for their kids. They diligently put gifts the kids receive into their savings accounts.
However, now that the balances are growing, she knows a savings account isn’t the best place for the money anymore. Jaynee would like your help to determine where she should put the money.
Background
- Two children ages 4 and 5.
- They deposit money given to the kids for birthdays and Christmas into their savings accounts.
- Each of the kids now have over $5,000 in their accounts.
- I assume the money won’t be withdrawn for at least 10-15 years based on the options she is considering.
Options
Jaynee wants to transfer the money to some sort of long-term plan. She’s unsure where she should put it, but is considering an IRA, a CD or their 529 college plans. Here are some of Jaynee’s thoughts:
1. Roth IRA
I’m considering a Roth IRA, so that when they begin working at age 16 they’ll already have a base and can then begin contributing to it when they get their first jobs. (Although, the kids cannot have an IRA until they have earned income, so they would need to use the parents’ IRAs.)
2. Long Term CD
Another part of me in considering several long-term CDs since my credit union is currently offering 7-yr $1K share certificates for 4.6% APY and 4.5% dividends compounded daily and credited monthly.
3. 529 Plan
Lastly, my husband thinks putting it into their 529 plans is best.
What Do You Suggest?
Let’s help Jaynee out! I’ll highlight your suggestions and add mine in a future article.
Where should she put the money for her kids? Should they keep it all together or spread it out in a few different accounts?
If you are saving for your children, what are you doing?
My 2 cents:
529 Plan – it’s pretty much an expense you know you will have and in a way it’s a cost avoidance, as well (not taking out as many student loans). Also, looking at it from a perspective of investment on your return in your child’s future career – those with college degrees and beyond make much much more than those that do not have a post-secondary degree. Tax-wise, it’s the same treatment as a Roth. I recommend picking a fund that has a target date, so they take care of the asset allocation/risk for you. We have a Fidelity 529 (index funds option) for both of our kiddos (5 and 7).
Ditto on the 529 Plan. The assets are considered the kids so it will be better for financial aid, plus the earnings and withdrawal are tax free when used for school expenses. Can’t beat that combination.
I also vote the 529 plan and it’s important for them to calculate the rate of return they need so that the investments they pick in that 529 plan aren’t too aggressive or too conservative. She can always mix it up, some in a CD or even a savings bond (Series I are federal tax free if used for education), to get a nice safe return. The crucial part is determining how much, rather than how.
It depends on how you intend to help your kids pay for college. I was able to cash flow it because we had so little debt. If that won’t work for you, then go the 529 plan. If it will, then consider investing in I-Bonds (you as joint owner) so that tax is deferred and principal is safe until kids learn to invest at 18. If you want that money to stay invested until kids retire, go Roth IRA.
I am a fan of College Savings Iowa (though I live in RI). You can deposit small amounts and the Vanguard Funds have great options.
Todd – The assets are considered the PARENTS (or whoever is the owner of the account) and this is better for Financial aid as parents are expected to contribute a much lower % of their assets.
We currently have two 529 plans set up – a different one for each child. Is it easy to transfer to another 529 plan should the one we want not have good ratings (they were both started under corporate 529 contribution programs). One is in NJ and the other is somewhere like Nevada. However, we’d like to switch the 529 plans to ones that are linked under Upromise, of which I’m a member, in order to earn a few extra 529 bucks when I buy groceries.
Thanks for the recommendations, everyone!
@Jaynee
I used to use Upromise….until I ran the numbers. Make sure you actually get more than $20 back a year in rewards. If you eat out a lot, you probably do, but we never did. They charge a yearly $20 fee ON TOP of the normal management fees of Vanguard (at least it was Vanguard when we were in it).
jrh – I already have $13+ in the Upromise account and I only started a few months ago. So I should easily pass the $20 minimum.