I have mentioned previously that I have a newborn nephew. In an attempt to be a good uncle (and because I’m in a better financial situation than the parents), I thought I’d start a fund for the young boy. It sounds like an innocent and simple goal doesn’t it? Well it turns out that if you want to do it right it is anything but easy.
My first thought was to give bonds – not Barry Bonds, but savings bonds. After all, for many years they’ve been the financial gift of choice. I decided against bonds based on a couple of factors. 1) The return on bonds seems to lag the overall stock market, and if he’s going to have this invest for a long time, I’ll take a little more risk to get more reward. 2) I cashed my bonds in to use for my first car – a fairly noble choice. However, I could have cashed them in to play Keno and lost all the money. I’d much rather give him something that’s guaranteed to help him in the future.
So I started to evaluate what kind of gift I could seriously give him to help him in the future. I even thought of somehow opening up a retirement for him and putting the money in there. It sounds silly, but imagine what you could do with 65 years in a Roth IRA. At 7% compounding interest (taking 10% and subtracting 3% for inflation), a $500 gift would be worth an inflation injusted $40,636 when he turns 65. How much do you think he’d love his uncle with that kind of head start? Alas I couldn’t find an easy tax-advantaged way for an uncle to contribute to a retirement fund on the behalf of his nephew.
In the end, I decided that investing in his education probably makes the most sense. The biggest question I had was how was I going to do that. There are numerous ways to invest in someone’s education. There are Coverdell ESA’s, 529 Plans, UGMA & UTMA Custodial Accounts for Minors, etc. It can make you dizzy just trying to decide amongst them. For my purposes it looks like the 529 offers the best way for contribute to his education.
However, since 529 Plans are set at the State-level and not the Federal-level, choosing the right 529 Plan is a study in itself. There are so many twists and turns in the 529 Plan maze that it requires it’s own post.Â This past weekend I did a lot of research on them.Â Tomorrow I will share what I’ve learned.