Financial Planning for Generation X & Y Women
 
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Expert Q&A Archive

11/19/2009
Are there better investments than savings bonds for grandchildren?
I have 4 grandchildren, ages 2-14 years. Normally, I buy $100 Series EE savings bonds for them for Christmas and their birthdays. I also have state (KY) college savings plans and a small savings account for each of them. I recently learned that savings bonds now take 20 years for full maturity and are paying a little over 1% interest. Is there a better gift to give them? What about coin sets? Any help would be appreciated.
Rosemary Ervin, CPA:
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The college savings plans (529 Plans) are the most tax-efficient gift, assuming the child will be going to college. Once the plan has been established, you can send a check for $100 whenever you want. The plan can be switched to another beneficiary if a child subsequently decides against going to college.

Savings bonds are paying a very low rate now, and you are locking the money in for a long time. Although coin sets are usually attractive to children, they are not as liquid as savings accounts. They are meant more for collectors. If the intent is long-term growth (you continue to contribute until a triggering event) then a savings account or 529 Plan will provide funds when the child's needs warrant the money. Hope this helps
Frank Wells:
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I would recommend a 529 college savings account for each as best, as it allows:

1. State Tax deduction for you
2. Ownership remains with you
3. Ease of transfer between family members
4. Investment risk based on age of beneficiary
5. Return should exceed 1 %
6. Investment selection can be automatic or chosen by you.
Gail V. Marquet:
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Savings bonds and coin sets are not a good investment for your grandchildren. You would be much better off putting the money either in the college savings plan or the savings account which you have already set up.
Pablo M. Bianchi, CFP:
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Who could argue with the recent appreciation of gold ....perhaps a coin set will not be a bad idea. Judging by your past investments, I am assuming that you are a conservative investor, and coins or gold are speculative investments. You may also want to consider buying some individual shares of stock from a company of your choice. You could also begin a DRIP program for their benefit. At the end realize that the yields are very low, but if you are looking for safety, the Series EE bonds will be a good choice for you. Good luck

[Editor's Note: DRIP stands for Dividend Reinvestment Plan. According to Investopedia, a dividend reinvestment plan is a plan offered by a corporation that allows investors to reinvest their cash dividends by purchasing additional shares or fractional shares on the dividend payment date.]
Steven Rodriguez:
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I am a fan of 529 plans myself. With 529 plans, the benefits are many. You can contribute no matter how much you make, and in some 529 college savings plans, you can accumulate as much as $250K per child. Since 529 plans accumulate savings tax-free, you can save almost 30% more than you would with a taxable college savings plan.

One of the things parents appreciate most is that the account holder maintains control of the account until the child reaches age 18, 21, or 25. If your child opts not to go to college, you can transfer the funds to another beneficiary, such as a sibling, cousin, nephew, or even to yourself. If your child receives a full scholarship you can take the money back for other uses, but then the earnings become taxable.

Lately, grandparents have been putting money into 529 plans for their grandchildren. The benefit here is that by removing assets from their estates, it could mean less tax for their heirs to pay when the grandparents pass away.

I would encourage you to compare the tax breaks you receive in your State's plan to the investment costs. If your state plan offers a tax break without low-cost investment options, you may want to look at other plans. Other states still have high fees and poor investment options, and some don't offer the same tax breaks.

To do this comparison, go to www.savingforcollege.com or www.collegesavings.org. You may also want to look up "The Best and Worst 529 College Savings-Plans" by Morningstar.
Delores Lenzy - Jones, CPA, CIA:
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The response to your question depends primarily on your risk posture. If you want a safe rather secure investment, definitely Savings bonds is a good vehicle. Other less risky investments include certificates of deposit and money market accounts. The higher the risk, the greater the return.
Martina A. Jimenez:
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It depends how much you have saved thus far; however, I would recommend investing it in the education plans.
Jeff Kyle:
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My advice is twofold! Truly, the best "security" that can be provided for them is to ensure that their parents OWN life Insurance (term or permanent)! The best way to "save" for the grandkids is a permanent life insurance policy. It accomplishes two things. First, it ensures their insurability. Second, it allows them to accumulate compounding, tax-deferred interest and, when the time comes to utilize the funds, they can be "borrowed" from the policy as a low interest loan to yourself (as the policy owner), and tuition or whatever you want to fund can be paid for that way. Interest rates range from 4-7%! It's a great vehicle that can help accomplish so many things!!
Rebecca Schreiber CFP:
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There is an excellent book called "First National Bank of Dad," where a father teaches his children to save by paying them interest on their saved allowance and birthday money. His children ended up saving so much that he had to reduce his interest rate. Consider starting a similar program with your grandchildren and offer to match them up to $100 on any savings they put in Bank of Grandma. They will feel that the $100 is earned instead of gifted and may be more careful about how it is spent.
Joanne Seymour Kuster:
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Consider starting with stock in American companies. There are several companies which kids know and enjoy, including those in the food and entertainment industries. You would recognize companies such as Disney, Nike, Wrigley gum, Mattel, Microsoft, Pepsi, Coca Cola, Harley Davidson, Burger King, McDonalds, Wendys, Kelloggs, Sara Lee, Yum! Brands, and more.

A small investment in the stock market while your grandkids are young can pay big dividends, and maybe pay for a college education. While you might make the initial investment, you are also starting the learning process for your grandchildren.

You can buy stock in small amounts. Some good places to start small accounts are:

www.sharebuilder.com
www.oneshare.com
www.buyandhold.com

If you have your own broker and account, you can ask your broker to help you start a Uniform Gift to Minors Account for each grandchild.

You can also start a DRIP (Dividend Reinvestment Program) account directly with a publicly-traded company. A DRIP offers another way for your grandchildren to make contributions of their own too, even as little as $10 or $25. Look for information on companies that do DRIPs at www.dripinvestor.com, which has a DRIP starter guide with helpful information.

When you buy a stock, you can order the actual stock certificate to present to your grandchildren, or you can leave the stock shares in account with the broker (in street name). If you get the certificate, be sure to keep it in a safe place (it's as good as cash). If you want more ideas on saving and investing for kids, there are free downloads at www.moneygodmother.com.

You should learn which stocks might be good investments by researching them at your local library. Remember there is risk with reward, and that a great past performance does not guarantee a stock's future performance.