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College money for nieces

Chris Farrell Sep 8, 2009

Question: My husband and I are looking for ways to help our two nieces (currently ages 1 and 3, and in two different families) with future college expenses. We’d like to contribute $1000/year to each of them and we’re wondering what the best way of doing this is. Should we have a trust set up for each of them? Or is there a better way? Thanks! Valerie, Minneapolis, MN

Answer: That’s a wonderful idea. But there is no reason to go the trust route. The easiest thing to do is find out whether the parents have established a 529 college savings plan. If they have, put the money every year into the account. Contributions into the 529 are with after-tax dollars. The earnings grows tax-deferred and withdrawals are free of federal taxes so long as the money is used for qualified educational expenses. In a majority of states withdrawals also escape state taxes. If they haven’t set one up I would encourage them to do so. They can open up an account in most states for about $25 or so. A good source of information is savingforcollege.com.

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