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Saving in the Parents' Names

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Saving money in taxable accounts in the parents' names has several advantages and disadvantages.

Advantages

The advantages include the following:

  • The parent maintains control over the asset.
  • The impact on financial aid eligibility is low, because the money is a parent asset.
  • Saving in the parents' names offers the maximum flexibility on choosing investments.
  • You can use the money for another purpose if the child decides to not go to college.
  • You can take full advantage of the other education tax benefits, such as the Hope Scholarship and Lifetime Learning tax credits.
  • Sales charges, redemption fees and management fees may be lower than in a section 529 plan, so you may end up with a higher overall return on investment.
  • There are no limits on the amount you can invest.

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Disadvantages

The disadvantages include the following:

  • Earnings are subject to income or capital gains taxes, unlike money in a section 529 plan. Your after-tax return on investment may be lower.
  • You may have less motivation to save because the money is not designated for a specific purpose. It is harder to measure progress toward your savings goals if the funds are commingled.
  • You may be tempted to use the funds for a different purpose.

Other Advice

If you decide to invest in the parents' names, you should consider taking steps to minimize your taxes, such as investing in mutual funds that are managed to minimize the tax bite, such as those offered by Vanguard. You can also invest in individual stocks (i.e., holding them long enough to qualify for the long-term capital gains rate) and offset capital gains with capital losses. But if you invest in individual stocks, you should take steps to diversify your portfolio.

 

 
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