Where do you put money for baby?
July 28, 2008 8:04 AM   Subscribe

So, we just had a baby and grandmothers keep coming up to us and handing us checks for $50 and saying "This is so you can buy a savings bond for the baby." However, I would like to hear about alternative saving/investing ideas for my daughter.

I know 529s are the hot new thing, but I hate that it can only be used for college. What if she decides not to go to college or needs the money sooner for whatever reason? Is there a good way to invest the money that keeps it in our name until a certain date and then it goes to her and has more flexibility than a 529? I am not sure that tax liability is a major concern since we are talking about like $400 right now, but we would like to set aside a regular amount ourselves and there will be birthday gifts and whatnot to add to it.

Having reviewed the older questions on this topic, I feel compelled to list some advice I am not looking for: "buy gold because the grid is coming down man!", "my parents didn't give me any money and I turned out fine so your baby don't need none either", "don't ask people on the internet, go see a financial planner right now" and generally anything crazy.

Also, I can be convinced that a 529 would be the best way to go, but I would probably need state specific information. We are in South Carolina.

Thanks in advance everybody!
posted by ND¢ to Work & Money (18 answers total) 20 users marked this as a favorite

You can use a Roth IRA to pay for qualified educational expenses, but it's not really the best option.

If you don't use the 529 money to pay for college, you pay a 10% penalty on the earnings, but you can still use all the principal and 90% of the earnings. You can also change the beneficiary of the 529. I'd really recommend it.
posted by mattbucher at 8:34 AM on July 28, 2008 [1 favorite]

You could open a Roth IRA for her. If you put $500 in now and $500 in each year until she is 18, she will have about $20,000 in the account, assuming a very reasonable 7% annual return. That $20k is a pretty decent nest egg for her own retirement savings. One reason many people do not start saving early is because it seems pointless to start with nothing. By giving her $20k and a history of steady contributions, she will be that much more likely to save on her own.

Of course, even if she didn't add anything to the account at all until she was 65, that $20k would grow to $480,000 on that same 7% return ($657k if she continues to put in $500 annually).
posted by jedicus at 8:35 AM on July 28, 2008 [1 favorite]

A Roth IRA may be closer to what you're looking for, but don't discard the idea of a 529 entirely. They can often be used for certain non-college educational expenses (trade schools, certification programs, etc) and can be transferred from one member of an immediate family to another. Also, where you live and where the 529 is based doesn't matter--I'm in California, our plans are administered in Virginia.

That's a pretty rad baby, by the way. Congrats!
posted by padraigin at 8:39 AM on July 28, 2008

Best answer: Also, where you live and where the 529 is based doesn't matter--I'm in California, our plans are administered in Virginia.

But be sure it's a South Carolina 529 in the sense that your contributions to it will be deductible from your SC taxes. (This may vary depending on state law, your tax bracket, etc.)
posted by JimN2TAW at 8:44 AM on July 28, 2008

Best answer: You could open a Roth IRA for her

There are several big reasons why this isn't a good idea. One is that the money in her Roth IRA will count against her when applying for student loans and scholarships if she does go to college. Another is that it is illegal to put anything other than earned income into the account, so you would not be allowed to use gift money for it. More details here.
posted by burnmp3s at 8:49 AM on July 28, 2008

assuming a very reasonable 7% annual return.

FYI, my Roth IRA is running about 1 - 2 % right now, so let's hope there are some 14% years to come in the Obama administration.
posted by mattbucher at 8:49 AM on July 28, 2008 [1 favorite]

Somehow my link to the article got mangled. Here's the correct one.
posted by burnmp3s at 8:51 AM on July 28, 2008

burnmp3s makes a good point about the earned income/gift money distinction. Consider my suggestion withdrawn, at least until she's old enough to be earning income on her own.
posted by jedicus at 9:06 AM on July 28, 2008

Best answer: Unless your baby is very precocious (and aren't they all), you can forget an IRA. An IRA account requires taxable earnings by the child, and that doesn't include chores around the house unless your child intends to file an income tax return on his/her allowance. It requires a real job.

The 529 plan is effectively a Roth IRA, but only allows you to spend on school expenses. You can still withdraw for other purposes, but would have to pay taxes and a 10% penalty.

A 529 is really a good deal, especially if you get it through a low-fee provider like Vanguard. The account earnings are tax-free and you spend the money tax-free. It is hard to imagine a situation in which a child would not be able to use the money for some sort of education, even if it is a trade school or art school. You can also use it to buy a computer or books that are required for school.
posted by JackFlash at 9:22 AM on July 28, 2008

But be sure it's a South Carolina 529 in the sense that your contributions to it will be deductible from your SC taxes. (This may vary depending on state law, your tax bracket, etc.)

The terms, fees, investment styles, etc. of the different state 529s vary a lot, and these differences can outweigh the deduction on your state taxes you get for using the SC version. I chose West Virginia's 529 over the one from my own state.

If there's any chance your daughter will be going to private school, you could think about a Coverdell ERA -- these are something like a 529 but can be used for K-12 expenses as well as college.
posted by escabeche at 9:34 AM on July 28, 2008

assuming a very reasonable 7% annual return

earning 7% into the teeth of the baby boom retirement drawdown is going to be . . . challenging IMHO.
posted by yort at 9:49 AM on July 28, 2008

I hope this isn't too much of a hijack. I live in Pennsylvania and participate in their "Guaranteed Savings Plan" 529. They offer two, one that looks like a conventional 529, run through Vanguard and this "Guaranteed Savings Plan", both linked here. Any opinions on which may be a better plan?

The conventional 529 looks like what I am used to with a 401k - choose the funds and let them grow, but the GSP guarantees a certain number of credits, based on an inflation formula, not necessarily tied to the stock market or any other indices.
posted by dforemsky at 9:49 AM on July 28, 2008

i don't have a suggestion, but i'd get her a couple of bonds, just for the fun of it. they're not worth much any more, but if you save them for her until college or some Important Event, they should be at least face value. actually, have grandma get her them.

i say this because my grandpa got me a shitload of $50 and $100 bonds when i was born in 1980. from 1998 when i went to college to sometime last fall when they ran out, my mother sporadically doled them out to me. grandpa died in 1989, so it was neat to see his handwriting again and the messages he or grandma (who died in 1981) had written on the envelopes. so while i got cash out of them, there was an even higher sentimental value.
posted by misanthropicsarah at 1:12 PM on July 28, 2008

Best answer: Unfortunately this doesn't help you in SC, but here's a resource page about states that have matched savings accounts for kids, 529 and otherwise.

This paper runs down the interactions between financial aid and savings accounts, but that's as of 2006; plenty could change by the time college rolls around.
posted by yarrow at 1:53 PM on July 28, 2008

When evalutating options, consider what kind of financial lunkhead you and your peers were at 18. Anything that turns over several thousand dollars to an 18 year old's unchecked control is likely going to go toward things you didn't have in mind when saving it. On that basis alone, a Roth would be sub-optimal and the 529 deserves reconsideration.

Keep in mind that a 529 isn't just for college. It can also be applied to vocational schooling. How likely is it that she'll never have use for either in her lifetime? But if do you find that she's truly never going to need it for school, at least you'll have preserved the option to reclaim all of your contributions without penalty and incur relatively modest penalties for withdrawing its earnings.
posted by nakedcodemonkey at 3:13 PM on July 28, 2008

If you go with some bonds, you might consider I bonds.
posted by gudrun at 6:33 PM on July 28, 2008

The nice thing about bonds is they can be cashed in quickly and in small increments.

During college and grad school, I'd occasionally need some cash. That's when I'd cash in a bond that had been racking up interest for a few years. You may not want to invest gobs of money in bonds, but they do have their uses.

Congrats on the little one.
posted by 26.2 at 10:33 AM on July 29, 2008

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