Question: What's the best way to start a college fund for children who aren't my own?

Do you contribute to a 529 plan?

I have two friends who have new brand new babies in their families. My best friend is a grandmother to a new baby; and my niece has a new baby. I would like to give them a small gift -- $25 to my friend and $50 to my niece -- to start or add to a college fund for the new babies. I am 65 years old, and don't want to control the fund once I give the gift. Education is very important to me, and I want the money securely held for college expenses for these babies and not available for anything else. I suspect my niece (she's a PA and her husband an engineer) already have a college fund established. But I suspect the daughter of my best friend (who's very financially responsible herself) hasn't even thought of a college fund. How can I do this?

Response:

You have a good heart. What I would do is tell both your niece and the daughter of your best friend what you would like to do. They need to set up the plan. If they haven’t, they can open a 529 in any state with as little as $25 to $35. The 529 college savings money compounds free of taxes. Withdrawals are tax free so long as the money goes toward qualified post-secondary education expenses, including tuition, room and board, fees, books, supplies, and equipment.

Once the account is open, you, the parents, other relatives, and friends can also contribute money if they want. To simplify the 529 choice, it’s usually cheaper to buy a 529 plan sold directly by the state. Most (though not all) of the plans sold through broker-dealers are too expensive. One resource if your niece or your friend’s daughter want to do more research on 529s is Finaid.

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