Daily Money Tip: Another way to save for college

Posted: January 23, 2014

Grandparents, there's another way to help pay for college - we thank Harry Miller of West Chester, a faithful Inquirer reader who called to explain his preferred savings vehicles when planning financially. He uses custodial accounts set up at a brokerage firm to save for his grandchildren's education.

The financially able and extremely generous Miller gave us the details on how he helped his daughter and two grandchildren save and pay for college. Rather than investing in traditional 529 college savings plans, he is socking away the money many years ahead of time using the Uniform Gift to Minors Act.

The UGMA established a simple way for children or grandchildren to own securities without a lawyer to prepare trust documents. You manage the money for your children or grandchildren. Currently, the gift limit is $14,000 per child annually.

Miller set up brokerage accounts for each of his grandchildren, ages 2 and 4, and is giving $14,000 per child per year for their college education to the accounts. He'll have given each child about $250,000 by the time they are ready to matriculate at age 18.

"The growth effect of the stock market should average 7 percent a year on top of the front-loading effect" of giving the money directly, he says, so he anticipates the accounts could grow to more than $250,000 by the time the grandchildren are ready for college. He also pays the taxes out of the account each year.

"I prefer this method to 529s, which differ depending on the state and the fees," he says. We asked which mutual funds these custodial accounts are invested in for that stock market growth. Among them are the following: Fidelity Spartan Extended Market Index Fund (FSEMX); Fidelity OTC Portfolio (FOCPX), which invests in more small and medium-size companies and in the technology sector; Wells Fargo Advantage Discovery Fund (STDIX); the Yacktman Fund (YACKX) and Yacktman Focused Fund (YAFFX); Oakmark International Fund (OAKIX) and the Loomis Sayles Bond Fund (LSBRX).

Remember, the custodian controls the assets until the minor reaches a certain age, usually 18 to 21, depending on the state.

"Often, the only people in a position to help financially are grandparents," he adds.

I asked Harry Miller if he'd take me on as his adopted granddaughter. I am available!


erinarvedlund@yahoo.com

646-797-0759

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