Hello.
First of all congratulations on becoming a dad!
Second, there is a massive amount of information available on this
topic, so I'll try to summarize the basics. For a more thorough
understanding of the subject, I strongly advise you to visit the
various links mentioned at the end of the answer.
I'll summarize the advantages and disadvantages of three options for
college savings: 529 plans, Coverdell Educations Savings Accounts, and
Roth IRAs.
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529 Plan
ADVANTAGES
-Earnings are tax-free.
-Contributions qualify for the annual $11,000 gift tax exclusion. This
allows for much greater contributions than other options.
-Contributions may be state deductible.
-Parent retains control of the account even after child turns 18 or
21.
-Accounts may be retained even after child turns 30.
-Assets are considered to belong to the parent, so there's less of a
negative impact on child's eligibility for college financial aid
programs.
-Beneficiary of the account may be changed from one child to another
DISADVANTAGES
-Investment options are limited by the particular plan.
-Penalties if the money isn't used for education.
-Distributions after 2010 may be taxable unless the law is extended.
Source:
Kiplinger.com: 529 Plan FAQs
http://www.kiplinger.com/basics/projects/wp_529s.html
Saving for college: Why 529 plans are so popular
http://www.babycenter.com/refcap/baby/babyfinance/1263733.html
The Bryant Group. Wealth Management: Education
http://www.bryantgroup.com/kidscorner.htm
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Coverdell Educational Savings Accounts (formerly Educational IRAs)
ADVANTAGES
-Money can be used also be used for private elementary, middle and
high schools.
-You have great control over investment decisions (e.g., stocks,
bonds, mutual fund, CDs).
DISADVANTAGES
-A maximum of $2000 per year may be contributed for each child. Given
the rising costs of college, this limit could hinder your efforts to
save.
-You and your wife must make less than $190,000 per yer combined to
qualify for the maximum annual contribution.
-No contributions after the child turns 18.
-Money must be used for education before child turns 30. Otherwise,
there are penalties.
Saving for college: Coverdell Education Savings Account (CESA)
http://www.babycenter.com/refcap/baby/babyfinance/1278799.html
The Bryant Group. Wealth Management: Education
http://www.bryantgroup.com/kidscorner.htm
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Roth IRA
ADVANTAGES
-Money in the account isn't restricted to educational expenses. You
can use it for your own retirement.
-You have great control over investment decisions (i.e., you can pick
and choose whatever stocks, bonds, mutual fund, or CDs in which you
wish to invest).
DISADVANTAGES
-You'll either pay taxes when you contribute to the IRA, or after you
withdraw from it, or both. Using Roth IRA funds for education
purposes does not incur the 10% early distribution penalty, but it
does not get you out of paying tax on the earnings.
-There are annual caps (e.g., $3000) to how much you can contribute to
the account.
-If you withdraw from your Roth IRA for your kids' education, you're
eating away from your own retirement assets.
Guide to Roth IRA: College Savings
http://www.fairmark.com/rothira/college.htm
Saving for college: IRA and Roth IRA accounts
http://www.babycenter.com/refcap/baby/babyfinance/1278803.html
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Based on the foregoing, it would seem to me that a 529 plan would be
the best option. The chances seem good that the 2010 sunset provisions
will be extended, as a decision to the contrary would be politically
unpopular. The only real downside to the 529 plan that I can see is
that you don't retain as much control over how the funds are invested.
The administrator of the plan makes the decisions. Of course, you can
change plans if you are unsatisfied with the results, but that would
undoubtedly be somewhat of a hassle. The best thing to do would be to
find a good 529 plan to start.
Here are some resources in that regard:
Kiplinger's "Best 529 Plans"
http://www.kiplinger.com/features/archives/2003/January/managing/best529s.html
Motley Fool: "Which 529 Is Best for You?"
http://www.fool.com/moneytip/2002/tip020716.htm
CNN Money: "The 529 Solution"
http://money.cnn.com/pf/college/features/529plan/index.html
CNN Money: "The 529 Solution: How to Pick the Right Plan"
http://money.cnn.com/pf/college/features/529plan/page3.html
Also see:
Savingsforcollege.com: FAQ
http://www.savingforcollege.com/learn/faq.php
Savingsforcollege.com: Links
http://www.savingforcollege.com/learn/link.php
TIAA-CREF: Saving for College
http://www.tiaa-cref.org/tuition/index.html
Smart Money: College Planning
http://university.smartmoney.com/Departments/CollegePlanning/
Collegesavings.org
http://www.collegesavings.org/
Sensible Investor: College Savings
http://www.sensible-investor.com/529_plans.html
Please keep in mind that this answer is not intended as a substitute
for professional investment advice. Note the disclaimer below. No
guarantees or warranties are expressed or implied.
search strategy: "529 plans", "college planning", "college saving",
ira, "roth ira", coverdell savings
I hope this helps. |
