Dear Liz, Recently, my granddaughter gave birth to twins. I would like to invest $500 in a trust for each of them to reach maturity at age 18. I hesitate to set up an education fund if they decide not to go to college. I would like something that includes growth and security, minimal overhead and minimal tax implications. Is there anything you can recommend?
Answer: The trust will be huge considering the relatively modest amount you have to invest. Instead, consider setting up 529 college savings plans that provide the benefits you’re looking for, including some flexibility in how the money is spent.
The money you invest can be invested in tax-deferred growth. Withdrawals are tax-free when used for qualified education expenses, which include expenses at vocational and technical schools, as well as colleges and universities. In addition, up to $10,000 per year can be used for kindergarten through 12th grade private school tuition. If the beneficiary does not use the money in his account, the balance can be transferred to another close relative. The account owner (you) can also withdraw money at any time. You would pay taxes on any gains, plus a relatively modest 10% penalty.
Legislation passed at the end of last year offers another option. Money not required for education can be rolled over to a Roth IRA starting in 2024. At least 15 years after opening the account, the beneficiary can start putting money into the Roth. . The amount rolled over cannot exceed the annual contribution limit (which is $6,500 in 2023) and the carryover period is $35,000.
These programs are offered by states and operated by various investment companies. You can learn more at the College Savings Plan Network.
Liz Weston, a certified financial planner, is a personal finance columnist NerdWallet. Questions can be sent to him at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or using the Contact form at: askliweston.com.