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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.
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.