Q. Your column today (Paying College Tuition) reminded me of a question I've been asking myself. I have two young grandchildren for whom I would like to set aside about $10,000 each. I would like to keep this money in my name in case I need it myself for some unforseen event.
Where would be the best place to park this money (if used for college, I will not need it for 12 or so years)? I'm not a good investor (makes me too nervous). Savings and CDs don't pay jack, so I've been thinking of an annuity, or maybe even savings bonds. Savings Bonds do not pay much interest, but I believe they're better than CDs, and they are state tax free. I understand if I use it for tuition, it can also be federal tax free. I'm 69. Wadda ya think? Thank you. James - Sacramento
A. I think it's great that you wish to help pay for your grandchildren's education.
The fact that you want to be able to access the funds, if needed, narrows down your options on saving for your grandchildren's college education.
You could contribute to a 529 Plan or a Coverdell Education Savings Account (smaller amount) but the growth would be subject to taxes and a 10% penalty, if the money was pulled out for anything other than qualified educational expenses.
The savings bond education tax exclusion is available to you if:
• You meet modified adjusted gross income limits.
• Your filing status is not "married filing separately".
• You pay qualified education expenses for yourself, your spouse or a dependent, whom you claim as an exemption on your tax return. If you don't claim your grandkids as dependents, you can't take advantage of this tax exclusion.
If you elect to go with an annuity, make sure that you understand all the costs involved (annual expenses) and restrictions on distributions, (e.g., surrender charges). Take the time to read the fine print.
Your remaining options include:
• After-tax investing (would pay "capital gains" tax on the growth)
• Using your Traditional IRA (would pay "ordinary income" tax on the amount distributed)
• Using your Roth IRA (no taxes due on the distribution).
A 529 plan is your best bet if you don't really think you'll need to tap into the funds. (In California, the state's 529 Plan is Scholarshare.)