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Ask Dave

College Fund Basics

Dave gives a listener three options for setting up a college savings fund for his granddaughter.

QUESTION: A listener wants to set up a college fund for his granddaughter.  He wants a fund to which other relatives can contribute with no cap.  Does this type of college savings exist?

ANSWER: There’s no such thing.  There are three things you can do:
  1. Open a mutual fund in the child’s name.  A Uniform Transfer to Minors Act (UTMA) will allow you to open the mutual fund in the child’s name that will be taxed at the child’s rate without a cap.  Others can add to this fund as well.  The child will get the money when he/she turns 21.

  2. You could also open an Educational Savings Account (ESA) which allows you and other relatives to put in up to $2,000 a year as long as the child’s parents don’t make more than $200,000 each year.  The ESA grows tax-free, is very flexible and I’d recommend that you do that with the first $2,000.

  3. The next thing I’d recommend is the 529, which allows you to select and move the mutual funds within the 529.  Make sure you get this flexible type of 529.  You can contribute up to $10,000 a year or $50,000 as a one-time estate planning contribution.