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Ask Dave

Investing For The Right Cause

Aaron is torn between a couple of investment options for his daughter; either an educational savings account or a mutual fund.

QUESTION: Aaron is debt free except the house and has money set aside for his 5-year-old daughter. What is the best way to invest that money so she can get the best return out of it if she goes to college or buys a house?

ANSWER: If you put it into a college fund, she needs to go to college because the government is going to penalize her so heavily for taking it out and using it for something else that you’re going to wish you didn’t do that. If you do a college fund, then brainwash the kid into thinking she’s going to college.

Do the first $2,000 a year into an educational savings account. They grow tax free when used for education. If you want to put more in after that, do a 529 plan. You have to be careful with those because there are some bad ones out there. The only kind I recommend are where you have complete control of the investment options.

If you’re going to save money for another reason for the child, like to buy a house, then you just want to open up a mutual fund in the child’s name. That’s called an UTMA, or uniform transfer to minors act.