Advice for nephews' college fund

[WallsGa]

Before you go any further, here's the TL;DR: what's the best legit way to multiply a very small college fund in 4 - 5 years?

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We have 2 nephews, 8th grade and 9th grade. The parents are not to be trusted with any money. Frankly, neither are we, but that's a different discussion.

Every Christmas an aunt sends us money for the kid's gifts. We have decided not to give them case anymore because they just buy some crap. We want to put it in a college fund, savings account, some sort of investment. We also will contribute $500 per year for them for the next 4 years.

There is a chance they'll go to college. There is 0% chance of their parents being able to help pay for any of it. The hope is we can give them a few grand total upon graduation for whatever expenses they have.

So, what's the best investment for the money? it's about $250 total at the moment.

 

[rumrunner55]

So there are educational specific drivers but are penalized heavily if the money is not used for school. That’s about the only way to multiply fast but it’s also an investment account that needs to be managed similar to a 401k so it has the potential to lose money.

 

[Sven71113]

Awesome that y’all are doing this! I am not super familiar with any ways to rapidly grow that cash, but I can give ya some tips to tell them that helped me graduate debt free on my own:
1. Keep those high school grades up and take advantage of hope scholarship/zell Miller.
2. Pell grant and other scholarships are a big boost. Apply for as many as possible.
3. Start at a community college and get those core classes out of the way on the cheap then transfer to another school.
4. Don’t overwhelm yourself with classes, but stay consistent and don’t drop out.
College ain’t for everybody, but it can be done right.

 

[WallsGa]

So there are educational specific drivers but are penalized heavily if the money is not used for school. That’s about the only way to multiply fast but it’s also an investment account that needs to be managed similar to a 401k so it has the potential to lose money.

Yeah, that's the only reason I am not considering a 529 plan - not sure if they'll go to college.

 

[WallsGa]

Awesome that y’all are doing this! I am not super familiar with any ways to rapidly grow that cash, but I can give ya some tips to tell them that helped me graduate debt free on my own:
1. Keep those high school grades up and take advantage of hope scholarship/zell Miller.
2. Pell grant and other scholarships are a big boost. Apply for as many as possible.
3. Start at a community college and get those core classes out of the way on the cheap then transfer to another school.
4. Don’t overwhelm yourself with classes, but stay consistent and don’t drop out.
College ain’t for everybody, but it can be done right.

Thanks. Great advice. yeah, scholarships or the GI Bill are the only hope they have for paying for any school. But for this discussion I'm just focused on how to grow this little bit of cash.

 

[rumrunner55]

Yeah, that's the only reason I am not considering a 529 plan - not sure if they'll go to college.

Well since high yield savings accounts and money markets are in the crapper yield wise the only other way is stock investment or CDs (again ****e rates) sadly right now it’s a great time to borrow and bad time to “save” but good job on taking initiative!

 

[GFB]

Tax-exempt bond fund maybe.

 

[sparked1]

Open the 529 plan for them. You can contribute up to $8000 per year for each recipient if file married jointly. Obviously you contribute what you can but you also get a deduction on your state return.

When you open the account, you select how you want to invest depending on the kids ages. The closer they are to graduation, the less aggressive the fund will be. Of course, you can select a more aggressive fund but there is more risk. Doubling the account is HIGHLY unlikely but every bit will help and hopefully they will appreciate it.

The investment works exactly like a 401k. It goes up and down which is why you need to pick the risk you’re comfortable with. If they don’t end up using for college, you can gift it to another recipient without penalty. If no one uses it for college, you will pay a 10% penalty on top of ordinary income taxes on the balance. But at least you get the bulk of it back worst case scenario.

 

[sparked1]

Anyway you slice it, you’re going to pay taxes on anything that earns interest. You might as well put it in a tax free vehicle that also gives you a state deduction. If the kids decide not to go to college the 10% penalty only applies to the earnings portion which doesn’t sound like a lot based on the info you’ve provided. So if you contributed $5k and the account gained $5k in earnings in 4 years (not realistic), your penalty would be $500 and $5k would be added to your income for that year. I would go that route and consistently encourage them to go to school.

 

[WallsGa]

Open the 529 plan for them. You can contribute up to $8000 per year for each recipient if file married jointly. Obviously you contribute what you can but you also get a deduction on your state return.

When you open the account, you select how you want to invest depending on the kids ages. The closer they are to graduation, the less aggressive the fund will be. Of course, you can select a more aggressive fund but there is more risk. Doubling the account is HIGHLY unlikely but every bit will help and hopefully they will appreciate it.

The investment works exactly like a 401k. It goes up and down which is why you need to pick the risk you’re comfortable with. If they don’t end up using for college, you can gift it to another recipient without penalty. If no one uses it for college, you will pay a 10% penalty on top of ordinary income taxes on the balance. But at least you get the bulk of it back worst case scenario.

We're going to give it to them, regardless. It's not any money we'd want back.