Benifits of a Roth IRA for children's education.

[Guest Gary Pescrillo]

I would like to open a fund and contribute monthly for my childs education(4-1/2)years old. I would like to know if a Roth IRA is the best way. I looking at many angles - a tax advantage, don't want to jeopardize getting college federal and state funding (didn't want account opened in her name), no withdrawal penalties. Thanks......

[John G]

One of the problems with the recently proposed "college savings options" is that the maximum contribution ($500) will not amount to much, even if you start at birth and run 18 years. ($500*18yrs = $9,000 which grows at 10% to about $23,000 or perhaps just ONE YEAR tuition/board at a state university in the year 2018!)

You may want to consider simply buying stocks of good companys and holding them until you sell to pay for tuition. Benefits: no interim taxes (except on dividends), long term capital gain tax rate, and the possibility of capital gains at your childs rate if the stocks are in his/her name. An index fund or tax managed mutual fund would come close to these benefits and might be more convenient due to the size of investment blocks and transaction costs.

Downside: if the stocks are in the kids name they can at 18 or 21 go and buy a car/drugs/vacation, interim transactions (switching stocks) can cause a tax event... these come to mind.

Concerning jeopardizing financial aide: the more you plan and work to fund your childs college, the less likely you will be to receive need based financial aide. Reckless spenders and careless parents are more likely to receive financial support. However, you are to be congradulated for thinking about college costs for a 4 1/2 year old. Starting a systematic savings program not only will go a long way to pay for your childs education, it will give you peace of mind and set a positive example for your child. Bear in mind, a lot of that financial aide is in the form of loans, rather than outright gifts.

I am not a big fan of the state sponsored prepaid tuition programs. You probably can do better investing yourself. However, you may want to call Fidelity and ask about their college investing plan. The plan has some interesting bells and whistles (it was set up in cooperation with New Hampshire but is open to other states, allows larger contributions, and has an interesting investment scheme).

Good luck.

PS: I have followed my own advice and feel comfortable about my two high school girls. An added plus, my soon-to-be sophmore has shown some skills picking good growth companies and likes to crunch numbers.

[This message has been edited by John G (edited 05-25-99).]