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April 18, 2006


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I signed up my daughter for the indexed Utah 529 plan and my son for the managed Nebraska 529 (hey, no reason for two plans other than it was after the stock crash and I got really paranoid about diversifying financial stuff.)

Nope, I don't live in Utah or Nebraska. I wanted plans that were well-run, and that could support my child's decision to go to any school in any state. My home state has no state income tax so I didn't care about any state tax advantages.

I went right to the state plan Web sites and set them both up. Was very simple, no broker needed, have been pleased with my choices.

My only question: people worry about the 529 "counting against me for aid" because the financial aid plans will expect a large percentage of those assets to be counted in the aid formula.

Well, DUH, that's why I saved the money, not to try to get more than my fair share of aid further down the road by squirreling it away elsewhere.

I am not too impressed with 529 plans. There are far too many restrictions placed on what can be done. States offer 529 savings plans that are good for tuition at public schools, or you can prepay tuition. However, private institutions are only allowed to provide tutition prepayment. Why would someone want to limit the opportunities available to their children? How certain is your child that he/she will want to get a degree and from where?

This is what is good about Coverdell ESAs. However, there are extreme funding limits. From the time your child is born to the time they are going to head off to college is about 18 years. From the time you are born to the time you are eligible for various retirement benefits is about 60 years. Now, it is unrealistic to think that you would be saving for retirement until you get into your 20's, so we can safely say that you have about 40 years to save for retirement. That is the problem with Coverdell ESA limits. You have less time to compound your returns, but you are extremely limited in the funds you can contribute.

This all brings me back to the idea of hiring your children in a home-based business (even a side business) and having them fund a Roth IRA. Up to $5150 is tax free for 2006, without other possible deductions. The Roth IRA limits are at $4000. And with all the tax incentives available for hiring your children, you can completely avoid paying payroll and income taxes on these funds. The contributions to a Roth IRA can be withdrawn for any reason without tax and penalty, and earnings can be withdrawn without tax and penalty for higher education needs. This allows you to contribute twice as much as a Coverdell ESA, and lets you keep any unused funds for retirement, whereas penalties are in the works for funds not used by the age of 30, in a Coverdell ESA. Plus, you still have the $2,000 you can contribute to the Coverdell ESA, for a total of $6,000 in 2006 when these two methods are combined. Absolutely zero taxes on these funds, ever. What a great concept. Plus, funds in a Roth IRA are not counted in financial aid!

Don't forget to have Junior get in on the college savings, too, in two ways:

1) Kids who are old enough to get a job (or entrepeneurs who start their own businesses) can contribute to their own savings before and during their college years.

2) Kids who get decent grades and participate in school and out-of-school activities increase their opportunities to win scholarships (as well as learning valuable skills, making friends, networking, etc.).

Kids whose hard-earned money helps pay for their education will value that education all the more. I teach at a community college, and I can tell you that my most serious students are those who have either been out in the world a while and are coming back to school, or who are working part-time (or full time!) to put themselves through. These students know that when Boss says, "Do," you "do," and they apply the same principle to their studies.

I have started a 529 plan for my unborn son/daughter (my wife refuses to find out if he/she will be a he/she). I started worrying about paying for college when my older brother had to start paying for his son's college education. Thankfully, he stayed in-state. When I was looking around on ways to save for college, I ran into several online college savings sites. basically, you shop online at regular big name retailers and earn savings through your online shopping. the 2 biggest I found were or so hopefully, when my daughter/son hits 17, ill be ready.

I just wanted to respond to the comment made by DUS10 that

"The contributions to a Roth IRA can be withdrawn for any reason without tax and penalty, and earnings can be withdrawn without tax and penalty for higher education needs."

Earnings on the Roth IRA grow tax-free, but I believe ONLY the 10% penalty is waived when the funds are withdrawn for "qualified" higher educational purposes and after the initial 5 year holding period. You would still be responsible for paying the capital gains (income) taxes of 5/15% on the earnings.

Both the 10 % penalty & income tax would be waived if the withdrawal was made after 59 1/2.

I still think this is a great plan-especially if reduced capital gains taxes are still in place.

Once babies had SSN, we started 529s for each (and thanks for the report card, glad to see we're well scored!) and send all Grandparent checks on in, as well as doing DD.

And we're putting a fair amount in from our online shopping, cause we're signed up at a great site called Little Grad ( Since you don't have to shop through their site, the money comes in automatically (you have to 'accept it' each time you shop at Gap, Walmart, etc...) Can't figure out why everybody doesn't do it?....

Can a child contribute to his or her own 529?

I am looking into setting up a 529 for my daughter and so is her grandfather.

Can we set up a single account and both contribute to it?

Also, if we do that, would we both be eligible for the state tax break on those contributions?

Does anyone know if a child can contribute to their own 529 plan account? If so, I am assuming there are no limitations to how much can be contributed (other than the max allowed by the 529 plan provider.

Thanks for your help

Tim --

Interesting question. My guess would be that yes, they could but I'd check it out at to be sure.

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