Routes to finance
Torsten Tiedt: How to choose the right share – Investor Club Special (January 2020).
As a parent, choosing the right college savings account can be overwhelming. There are several options, all with unique sets of complex rules. Knowing where to start can be difficult at all, but making the right choice when your child is young will save you a lot of fear when it comes to applying for financial help and looking for scholarships. The right type of college savings account can often be revealed by a few simple questions:
Question 1: What do you prefer – a safe but lower return, or something that can grow faster but could involve potential losses?
When it comes to your security, find out if your state offers a Section 529 prepaid curriculum. These plans allow you to earn tuition fees in today’s dollars and are guaranteed by the issuing state to provide you with an equivalent tuition fee in the future. These plans are unlikely to outperform the stock market, but you can find comfort in the fact that your money is safe.
If you’re looking for a higher return, you’ll need to determine if your state offers a Section 529 investment curriculum. These plans offer you options from reputable investment firms. If the market goes up, your investment will go up, but it can go down if the market goes down.
Series EE and Series I bonds have historically earned 3-6%, causing them to lag behind Section 529 prepaid curricula.
If you buy individual bonds in a UGMA / UTMA account, you may receive repayment of the prepaid curriculum, but will be taxed on all interest earned on a certain amount. Using bond mutual funds in any of the other savings plans can offer an equal historical return, but is also subject to volatility and potential losses.
Since most states’ plans primarily cover public colleges and universities, you should plan for Independent Section 529 if you believe your child will be in private school.
Question # 2: Where do you live?
Many states offer significant financial incentives to use their Section 529 savings plan. Given that some states are essentially spending money to use their plan, it would be foolish not to take advantage of this. You may be eligible for a deduction or credit from your state income tax return, or your state may actually cover your contributions to the plan up to certain limits if you are a resident.
Since many states offer at least one or two good long-term stock options in their savings plans, it is probably advisable to do so "free money" to take."Even if you don’t have access to your favorite mutual fund, this first boost will increase your returns over time.
Question # 3: You can save more or less than $ 2,000 per child per year?
If you can save more than $ 2000 a year, a section 529 savings plan might be your best bet. The only limits on contributions to savings plans under section 529 are "lifetime" -Totals for each child. From the low $ 100,000 to over $ 300,000, most parents can contribute to their hearts’ content.
Even better, these amounts are tax-privileged and may be tax-free. the ability to remain under the control of a parent or donor forever, and even to take back assets for personal use.
On the other hand, if you can’t save $ 2,000 a year, a Coverdell ESA might be good for you. A Coverdell ESA offers freedom in choosing your investments, as well as much more relaxed standards, such as t The money is spent (including classes for classes K- 12). The case for a coverdell becomes even worse when you have multiple children. This is because you can transfer unused funds to another Coverdell account or set up a new one for other family members, including grandchildren.
Question # 4: What about UGMAs, UTMAs, Roth IRAs and trusts?
While these vehicles offer some unique planning options, they won’t serve most families, as well as Section 529 plans or Coverdell ESAs. UGMA and UTMA custody accounts are almost four times as strong in financial support and require the transfer of the assets to a child at the age of 21 at the latest. A Coverdell ESA or Section 529 account offers practically the same tax benefits as a Roth IRA without wasting a valuable opportunity to save for your retirement. Trust may sound impressive, but it is extremely expensive to set up and operate. Do not consider any of these unless you want to exceed the maximum allowable contribution limit of section 529 plan.
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