Where to put money for kids college funds?

PingSpike

Lifer
Feb 25, 2004
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My mom recently passed away and one of the last things she wanted to do was give each of my kids money for college. But I'm a little at a loss for what to do with this money. I see there are some savings accounts for this kind of thing although I don't expect them to earn much. Anyone have an recommendations?

The combined money for the kids probably also exceeds that 10K gift amount for the IRS so I'm not sure how that will play out with taxes.
 

dullard

Elite Member
May 21, 2001
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Sorry to hear about your loss.

I use several 529 accounts for my nieces and nephews. It doesn't do much, but it does let me lower state income taxes and gives me a way to invest money for them. Every state has different 529 laws, so I can't say how it would work where you live. But for me, I can put up to $10k in per year (total across all kids), then I save 7% in state income taxes ($700). I handle that by putting in $10,700/year so the kids ultimately benefit from the state income tax reduction. Even if the investments turn out to return nothing, that extra $700/year will add up.

Is the money from your mom's estate to the kids? Or is it from your mom's estate to you, then gifted to the kids? That will impact how the taxes are handled (and is beyond my knowledge to help).
 

PingSpike

Lifer
Feb 25, 2004
21,695
518
126
Sorry to hear about your loss.

I use several 529 accounts for my nieces and nephews. It doesn't do much, but it does let me lower state income taxes and gives me a way to invest money for them. Every state has different 529 laws, so I can't say how it would work where you live. But for me, I can put up to $10k in per year (total across all kids), then I save 7% in state income taxes ($700). I handle that by putting in $10,700/year so the kids ultimately benefit from the state income tax reduction. Even if the investments turn out to return nothing, that extra $700/year will add up.

Is the money from your mom's estate to the kids? Or is it from your mom's estate to you, then gifted to the kids? That will impact how the taxes are handled (and is beyond my knowledge to help).
It looks like it's one check straight to me and my wife. I guess I'll look into the 529 and my state.
 

herm0016

Diamond Member
Feb 26, 2005
8,172
851
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how old are the kids? a 529 is great, and you should do that to the max limit.
another alternative is whole or variable life insurance policies. we are considering this for our young god children, something we can control and contribute to that will set them up later in life. If they keep it around till retirement, its possible that it will fund much of their retirement needs. It is after tax money for us and will be able to be taken out as a loan or cash when they need it without tax liability. You can increase your cash value right away by paying above the premium up to some limit. Talk to your advisor for details obviously. we use northwestern mutual. My dad bought me a small policy that cost $99 every 6 months when I was 1 YO. I recently did a loan for 10k from it for something and paying it back, its cash value now is well north of that. we plan on keeping it as a down market draw option for retirement in 20 years or so. should be worth a a year or 2 of expenses by the time we retire. total cash cost will be something like 11 or 12k between my father and I, not accounting for present value.
 

Torn Mind

Diamond Member
Nov 25, 2012
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Give it to ponyo so he can personally advocate for you in front of Elon. :p:D
 

JM Aggie08

Diamond Member
Jan 3, 2006
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We just setup a 529 with Vanguard. Their target date fund is A+ -- moves from more aggressive funds to less volatile as they approach college age.
 

dullard

Elite Member
May 21, 2001
24,100
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The kids can also invest in an IRA at any age (with the money you gift them).
another alternative is whole or variable life insurance policies. we are considering this for our young god children, something we can control and contribute to that will set them up later in life. If they keep it around till retirement, its possible that it will fund much of their retirement needs.
Whole life insurance and/or overfunded life insurance plans have significant positives. They also have very significant potential drawbacks including losing much of the gains if you are a day late ever in the 60+ years you might have it, high and variable fees that are outside your control once you sign up, caps on potential gains, etc. Scroll down to the "#10 Internal costs are not guaranteed:" section and read all 10 of the listed potential drawbacks. https://www.forbes.com/sites/garrettgunderson/2020/04/15/the-risks-of-cash-value-life-insurance/?sh=310feee1514c If they work, they work great. But, there is a lot of room for disaster too. It is something that you have to keep with for the rest of their lives, no matter how things change, for you to get a chance at a good return.
 

herm0016

Diamond Member
Feb 26, 2005
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The kids can also invest in an IRA at any age (with the money you gift them).
good points.

the IRA would be in their name, and we would have no control over it? and we are looking at some kind of long term giving a bit per year, cant really do a lump sum.

would the IRA gift also count as our IRS gift? we would like to save that for when we die, or older as we don't have kids.
 

deadlyapp

Diamond Member
Apr 25, 2004
6,389
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I don't know how much it is, or how close the kids are to higher level education, but I'd think about maxing out on I-bonds right now (10k / year) with how high the rate currently is, and then putting a balance in a 529 which could have some tax advantages (at least when withdrawn). Stocks are going to stay fairly depressed over the next few years I suspect, but if they are at least 5-10 years out from higher education, then you should get a great balance through both of these.

Outside of that, just a basic brokerage account would be good, or even create a trust to hold the money and then create a brokerage from the trust.
 

deadlyapp

Diamond Member
Apr 25, 2004
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598
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good points.

the IRA would be in their name, and we would have no control over it? and we are looking at some kind of long term giving a bit per year, cant really do a lump sum.

would the IRA gift also count as our IRS gift? we would like to save that for when we die, or older as we don't have kids.
Realize that the gift tax really only affects you if you expect to hit the $11MM lifetime gift exclusion. You can even gift over $15k yearly limits as long as you stay under the lifetime exclusion.

IRA could be in anyone's name, just depends on how you want to distribute it later. You can have joint IRA account holders (I believe) so you could administer it. I personally don't think an IRA is the right choice though since there are penalties to withdrawing early and I don't see any tax benefits.
 
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nisryus

Senior member
Sep 11, 2007
616
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Here is pro and cons of using roth-ira for kids college


"While non-qualified distributions from a Roth IRA are subject to ordinary income taxes plus a 10% tax penalty, the tax penalty is waived if the distribution is used to pay for qualified higher education expenses."
 
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PingSpike

Lifer
Feb 25, 2004
21,695
518
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Thanks for the ideas, I actually never thought about using retirement accounts although I don't think I'll go that way.

One question that maybe no one can answer: Since the check is in my name, is there any tax difference if I just put it in my savings account temporarily while I set something up?
 

nisryus

Senior member
Sep 11, 2007
616
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106
I guess there won't be any tax difference if the money was moved out before you get interest paid... so set something up before that happens?
 

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