Personal Finance: Ask the Experts

Get advice on money matters from The Bee's Claudia Buck and a panel of local experts

July 24, 2012
How should I save for grandchildren's college education?

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.)

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Meet Our Financial Experts

Claudia Buck

Claudia Buck is The Sacramento Bee's personal finance columnist. Read all her columns here. Contact her at cbuck@sacbee.com

Terri Carpenter

Terri Carpenter offers advice on job hunting, retraining and career counseling. Carpenter works at Sacramento Works Inc., the career and job training arm of the Sacramento Employment and Training Agency (SETA). With 15 years in the field, she has hands-on experience with everyone from first-time job seekers to career professionals seeking advice after a layoff or looking for a mid-career change. Ask her a question.

Carlena Tapella

Carlena Tapella is a partner in the law firm of Webb & Tapella Law Corp. in Sacramento. The firm specializes in estate planning and probate, such as estates, trusts, conservatorships and litigation. She is a past president of the Sacramento County Bar Association's Estate Planning & Probate Section. Ask her a question.

Kimberly Foss

Kimberly Foss, certified financial planner, is the founder of Empyrion Wealth Management in Roseville. With nearly 30 years in the financial industry, her clients include women in transition, small business owners, retirees and "pre-retirees." Ask her a question.

Jesse Weller

Gregory Burke, a CPA and tax expert with John Waddell & Co. in Sacramento since 1984, worked as an IRS tax auditor for six years. He’s a past chairman of the California Society of CPAs. Ask him a question.

Daniel Tahara

Daniel Tahara takes your questions about California taxes. Tahara, a spokesman for the state Franchise Tax Board, has 10 years of experience as a tax auditor. Ask him a question.



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