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Author Topic: Savings for Children
Godric 2.0
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So, I want to start saving for my daughter and I'm not sure the best way to go about that. I hear good things about Section 529 college savings plans, but what happens if she doesn't go to college?

Anyone know anything about these? Do you save for your children? And if so, what accounts do you use?

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scholar
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My financial analyst told me not to invest anything in my child until I have my retirement funds fully funded. If need be, I can take money out of that fund for the baby. Also, for college, my kids could take out student loans, but no one will give me a loan for retirement.
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Godric 2.0
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Interesting. I started a 401K with my current employer as soon as I was eligible (it's taking quite a pounding here, but it's a long-term investment, so I'm not freaking out), so I'm not "fully funded" but I'm on my way.

I'm not sure that I'd want to take money out of my retirement account for my children though. That's my retirement fund and I'd like it to remain so. That seems odd to me.

And while my daughter (and any future children) can certainly take out loans, they'll be paying interest paying them back, whereas if I have some sort of savings account set up now, it will be gaining that interest over the years. I'd feel much better knowing that they're a step ahead instead of a step behind. At least, that's how I'm looking at it. I'd be interested in hearing more of your financial analyst's reasoning... Maybe I'm wrong.

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scholar
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I think the idea is that if you have enough money for both, you fund both, but if there is a choice, then you fund your retirement.
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andi330
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I'm not an expert about 529 savings plans so I won't try to answer your question. I would like to say, however, that I was extremely grateful that my parents chose to save for my college education, and save well. Unlike the majority of my friends, I graduated debt free, which made my life considerably easier. I didn't have to make the hard choice of going to graduate school before I was ready, simply to defer my loans. And I didn't have to worry about defaulting on my loans during those first couple of difficult years after graduation, when I was earning very little.
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Godric 2.0
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LOL... I never have enough money. But if you start taking $20 or so out per paycheck, after a few you don't miss it.

And even if I keep it at $20 per pay period, that's going to add up to a substantial amount over 18 years.

I just don't know where the best place to put it is.

My parents never saved anything, so I started out in debt (especially after having to help pay for my father's funeral expenses). I don't want that to happen to my children.

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fugu13
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For that amount, open a Roth IRA for yourself and start socking it away. You can withdraw money from it for your children's education without triggering any penalties, and it also qualifies as retirement/first-time home ownership/serious medical expenses savings.

Oh, but first, are you contributing up to the maximum that your employer matches on any retirement benefits available?

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scholar
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I have debt from school, but my parents can pay for their own retirement. If I was given the choice of having no debt or my parents having a retirement fund, I would pick them having money. It is very freeing to know that I don't have to provide for them in the future and that my financial decisions are just about me. If I could have both no debt and no fears about my parents, that would be the best. [Smile]
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rivka
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529s are good, but yeah, won't do much if she doesn't go to college.

Listen to fugu. [Smile]

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Godric 2.0
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My employer seems to have a funky 401K match policy. They don't match anything, I believe, until I've been here at least 3 years. From there they'll match slightly higher percentages until I max out at 7% match after I've been here 8 years. Those numbers may not be exact, but it's something like that.

I'm only investing 3% right now, but I can bump that up every year.

I thought there were some legal questions regarding Roth IRAs. But I've only skimmed the information. Can you explain the basics of how they work? And can you recommend someone to talk to for details?

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pooka
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The main thing about Roth IRAs is that they are not tax deductible now, but they are tax free at withdrawal. I think their introduction was a big help to the economy in the 90's. They also don't have as many withdrawal restrictions and conditions as traditional IRAs. At least, that's what I recall Suze Orman saying about them.
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dkw
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If you do decide to go with a 529, remember that you don't have to do the one in your home state. We started one for John here, but our financial advisor had us roll it over to one in another state that has better investment options.
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rivka
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I did not know that, dkw. Cool.
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fugu13
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Yes. With a Roth IRA, you pay into it using after-tax dollars, but the withdrawals are not taxed (though they can be penalized).

This is usually a very good thing, because, especially early in life, one's tax bracket can typically be expected to be lower while contributing than while withdrawing. This makes money invested in a Roth IRA have a higher bang per buck for most people than money invested in a traditional IRA.

As pooka notes, they are also easier to withdraw from. You can withdraw from them after retirement age without penalty. You can also withdraw from them for qualifying educational expenses (which are fairly broad) for any family member without penalty. You can withdraw to help out a first time home purchase, without penalty. You can withdraw to cover major medical bills in certain situations, without penalty. You get the idea. Oh, and you can withdraw contributions (though not earnings) without penalty after five years.

They aren't counted at all when you apply for federal aid, unlike a 529 plan, which is a very large benefit. However, withdrawals are counted as income the next year, which can be detrimental.

I have seen a sound strategy advocated here to avoid that problem: http://www.savingforcollege.com/529_monthly_columns/guru.php?guru_id=13

quote:
Although this sounds like a tremendous advantage for the Roth IRA, the picture can change dramatically if the Roth IRA is actually withdrawn for college expenses. All withdrawals (principal and earnings) are picked up as base-year income on the following year's financial aid application, and base-year income is assessed at rates as high as 50% in the financial aid calculation. (If you plan on using your Roth IRA to meet college expenses, consider borrowing the money instead and repaying the debt with IRA withdrawals after your child finishes his or her junior year.)
Again, so long as your withdrawals are less than contributions prior to five years before, they can be taken without penalty and put against the loan, and you can then withdraw earnings in your kid's senior year, up to qualifying educational expenses (such as tuition, books, et cetera).

A particular benefit of the Roth at the present moment is that stocks are very cheap and not likely to become much more expensive, as the recession sets in. Even most of the hardest hit financial institutions (the ones precipitating the crisis) tend to still be making profits as they are writing down billions upon billions of dollars of assets by marking them to market -- which means those assets may well again improve in value for the firms that whether the storm. While some individual companies will go under, purchases of broad index funds (like ones investing in the S&P 500) are especially wise in the near future, because prices are depressed.

This is especially true if your place of work qualifies you for any of the better institutional funds and their correspondingly low fees.

Here's a page that might be interesting: http://www.smartmoney.com/mag/index.cfm?story=ask-november03

You can find that and a variety of others by googling 'roth ira 529'.

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rivka
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quote:
Originally posted by fugu13:
They aren't counted at all when you apply for federal aid, unlike a 529 plan, which is a very large benefit.

The rules on how 529s get counted when applying for aid are complicated. Also, distributions are NOT counted anymore. Link (ED guidance has made this true since 2006, but it is now explicitly in the law thanks to CCRAA (Or was it HERA?))
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fugu13
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Yes, I was only talking about the distributions of the Roth being counted. 529 plans are (generally) counted as assets, but their distributions are not counted, while Roths are not counted as assets, but their distributions are counted.

Properly handled, I suspect that makes a Roth in the same amount, particularly for a family eligible for the best loans, able to provide for more for college than a 529.

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rivka
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Unless the 529 is in someone else's name, like a grandparent. [Wink]
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fugu13
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This is very true.

edit: is it possible to directly make a contribution to someone else's 529 plan? If not, how would parents making transfers to the grandparent work?

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rivka
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quote:
Originally posted by fugu13:
is it possible to directly make a contribution to someone else's 529 plan?

Finaid says:
quote:
Anybody can contribute to a prepaid tuition plan, including grandparents and friends of the family. This lets people give the gift of education. Section 529 plans are especially good for grandparents, because of the estate planning features.
(Even if that were not the case, the gift laws might be useful.)

Oh, and 529 plans are transferable.

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