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Unsolicited Advice #437

Yesterday morning I balanced my checkbook for the first time in two months. I sat with my cup of coffee, my calculator, and two months’ worth of statements. Yay for writing stuff in the register! Yay for paychecks! I managed to balance that bad boy in about half an hour. When it was time for me to get ready for work, I left my papers spread out on the table.

At breakfast, my 9yo son peered over his bowl of Cheerios at the mess I’d left behind.

“Is this your checkbook?” he asked.

“Yes.”

Pause.

Then, “Mom?”

“Yes?”

“Will you write a check for my college education?”

Hahaha!

Why yes, it’s just that easy, son!

“Yes, honey,” I said. “I will pay for your college education. You know that Dad and I are already saving up for that, right?”

He nodded. “Uh-huh.”

You know I don’t talk about money on this blog. Horrors! Who would want to? Money is a prickly and ticklish subject, and this is supposed to be my writing-and-slices-of-life journal.

But if you’re the parent of a child who will attend college sometime in the next eighteen years, you may want to keep reading. (Those of you with college-age children have already made your bed, so to speak.)

What’s that? You want to hear about writing-and-slices-of-life?

Oh.

Well, there’s not much to report. I had a cold that was so bad I thought it might actually kill me. I’m better now. And I’m weeding more than I’m writing, the past few days. I’m waiting to hear back from one especial agent about a full. I’ve got two other queries floating out there, but I’m sick of querying. I’m going to pin my hopes on Especial. If those hopes and pins get yanked, oh well. I’ll start querying again.

On to the unsolicited advice!



Okay, first off: I’m not a qualified financial advisor, so I couldn’t legally sling the advice even if I wanted to. (Oh wait: this is the Internet. Anyone can post anything here – accurate or not!)

But as one parent to another, here’s an important tip about saving for college:

If you don’t have an Education Savings Account (ESA) (also known as a Coverdell account, named after some dead guy who was a Senator) set up for your kid, you should really consider it.

I see your eyes glazing over. Hang on. Just listen for another two minutes:

The great thing about ESAs, as opposed to a regular savings accounts, is that the earnings are tax-free.

That rocks.

The money can also be used for elementary and secondary schools, not just college. So if you decide Junior must attend a private school, you can access the ESA funds for the tuition.

You can contribute up to $2000 per child per year. Depending on your situation, that may sound like a lot, but that’s the minimum of what you should try to save for college each year. And if you can only manage $300 or $750 or whatever … well, at least you’re saving what you can. You’ve heard of compounding interest, right? I’m not going to go into that, because even my eyes will glaze over during that discussion.

Okay. So that thing I said about the earnings being tax-free? Here’s an example:

Lisa opens an ESA for Cole at a stock brokerage – Ameritrade, let’s say. She makes her contribution, and decides to buy stock with the money. She buys 100 shares of Cute Shoes (HEEL) at $10 a share. Five years later, she decides to sell Cute Shoes, which is now trading at $20 a share. (Go, Lisa, with your mad stock-picking skills!) The gain for that sale is TAX FREE! Yes, that’s in bold, because that is made of awesome! You do not have to pay capital gains tax on gains in an ESA.

Plus!

Let’s say that Cute Shoes does so well that the board of directors decides to pay dividends to its shareholders (kind of like interest). They pay 15 cents per share twice a year during those five years. Cole’s account has earned $150! Again, TAX FREE! That’s a heck of a lot better than the interest you can earn on a regular savings account.

Okay.

Now.

Hold on. Remember: you should only invest money in the stock market that you can afford to lose.

Even if you do your research, and you invest in a company that looks robust on paper, it might be run by snake oil salesmen (Enron, WorldCom) or some guy with a taste for expensive yachts and artwork (Tyco).

What if Cute Shoes drops to $2 a share? Lisa’s $1000 contribution to Cole’s college savings account is now worth $200.

Scary, I know.

I want to scare you, because I want you to be careful.

If you stick to mutual funds, or stocks with a history of steady earnings and growth, you should be okay with Junior’s money. Otherwise, just keep the money in a money market account and let it earn tax-free interest.

Lastly, another great thing about ESAs is that the funds must be used for education at accredited institutions. So if Cole comes to me at age eighteen and says, “Mom, I’ve decided to spend my college savings on steroids and personal trainers so that I can become the greatest WWE wrestler in the world. I’ve also decided to have my name legally changed to Hard Head, but you can call me Hard,” I can say, “Great idea, honey. Here’s what we’ve scraped together for college … except for the funds in your ESA, which we will be transferring to your cousin.”

So there you go.

My Wednesday word.

Of course, there’s more to ESAs than I’ve described in my rudimentary way. Here are some links to people who are qualified to tell you about them:

http://www.fool.com/college/college02.htm

http://www.irs.gov/publications/p970/ch07.html

Comments

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aprilhenry
May. 9th, 2007 06:51 pm (UTC)
We're just putting it all in a 529. Should I be doing both? I thought there was a rule about only doing one or the other.

A
dampscribbler
May. 9th, 2007 07:28 pm (UTC)
Take a look at the articles at fool.com, they're quite informative. I got this piece of info from the one at: http://www.fool.com/college/college05.htm

Thanks to the Economic Growth and Tax Relief Reconciliation Act of 2001, investors can simultaneously contribute to a Coverdell ESA and both types of 529s. Why would you do this? Here are a few scenarios: (click the link above for the rest)

aprilhenry
May. 9th, 2007 08:10 pm (UTC)
Hm, I guess I believe Congress will continue to keep it tax-free, so I think I'll just stick with the 529 for now.
dampscribbler
May. 9th, 2007 08:56 pm (UTC)
Are you doing a 529 savings or pre-paid tuition? Since my daughter is only 2, we plan to choose savings over pre-paid tution. Too hard to guess at this point where she'll be wanting to attend school. But I'm overwhelmed, I'm afraid there will be a lot of choices to sort out, and I'm not excited about doing that.

We'll do an ESA, also, since we can use it before college if we should decide on a private school for some reason. At least during the years when we can afford put money into more than one type of account. :)
aprilhenry
May. 9th, 2007 09:02 pm (UTC)
Nobody in Oregon offers prepaid tuition that I know of, and who knows where my 11 yo will attend school? But private school is not in our future unless we can get some kind of private income!
dampscribbler
May. 9th, 2007 09:11 pm (UTC)
We're paying as much for daycare now as some private schools charge. I'm looking forward to not doing that, but if I don't like what's going on in the public schools once she's there, I imagine we'll find the money for private, just like we're finding the money for daycare now.

I had horrible experiences with my public schools, and I really don't want my daughter to suffer the way I did. But that's a rant for my own blog. :)
lkmadigan
May. 10th, 2007 04:24 am (UTC)
A 529 plan is great.

The difference is that someone else - a money manager - controls the securities held in the state-sponsored 529 plan.

I like choosing my own investments. I recall that several years ago the manager of the Oregon plan, Strong Investments, I think they were called ... had made some bad choices in investment. NOT Strong! I don't know if they even manage the plan anymore, but I like doing it myself.

And I don't do a prepaid 529 because I have no idea where my kid will want to go to school.


aprilhenry
May. 10th, 2007 05:25 pm (UTC)
I can barely manage my shoes, let alone pick stocks. I do look like a genius because about 18 months ago I moved half her money into a foreign fund which has been doing really well. I'm sure the genius part is only temporary.
dampscribbler
May. 9th, 2007 07:30 pm (UTC)
Thanks for the reminder. I've been dragging my feet about this for quite some time. Right now I'm going to block off a couple of hours on my calendar next week to get an ESA started, and do some looking into 529s.
lkmadigan
May. 10th, 2007 04:25 am (UTC)
Good - I'm glad to hear it.
(Anonymous)
May. 11th, 2007 01:17 pm (UTC)
"Hard", & Spending ESA $$$
Can Dad, in his old age , use the money to attend auto mechanics and pottery making classes at the local junior college?
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