Ask Money

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

Marketplace Staff Oct 2, 2013
Ask Money

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

Marketplace Staff Oct 2, 2013

Question:

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:

Chris Farrell Oct 3, 2013 Economics Editor
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.

We’re here to help you navigate this changed world and economy.

Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.

In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.

Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.