Long term investing on behalf of newborn
I have some gifts from friends and family for my newborn daughter. I would like to invest these but I don't know what is the best way. 529 plans spring to mind but I don't know what the educational atmosphere will be in 18 yeas (Will the idea that every person needs to go to college fizzle out? Will the rate of tuition increases continue?). Should I go with the 529 anyway or aim for a more flexible option? If I go with something else, would it be wise to go high risk since this money is not for a short term need or should I go with stable since it is not my money to gamble with?
For reference, I am located in PA, USA.
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There are two types of 529 programs.
One where you put money aside each month. The one offered by your state may give you a tax break on you deposits. You can pick the one from any state, if you like their options better. During the next 18 years the focus the investment changes from risky to less risky to no risk. This happens automatically. The money can be used for tuition, room, board, books, fees.
The 2nd type of 529 is also offered by a state but it is geared for a big lump sum payment when the child is young. This will cover full tuition and fees (not room and board, or books) at a state school. The deal is not as great if they child wants to go out of state, or you move, or they want to go to a private school. You don't lose everything, but you will have to make up the shortfall at the last minute.
There are provisions for scholarship money. If you kid goes to West Point you haven't wasted the money in the 529. The money in either plan is ignored while calculating financial aid.
Other options such as the Coverdell Education Savings account also exist. But they don't have the options and state tax breaks. Accounts in the child's name can impact the amount of financial aid offered, plus they could decide to spend the money on a car.
The automatic investment shift for most of the state 529 plans does cover your question of how much risk to take. There are also ways to transfer the money to other siblings if one decides not to go to college. Keep in mind that the funds don't have to be spent as soon as they turn 18, they can wait a few years before enrolling in college.
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