Last December, I became the primary caregiver of my late sister’s 5-year-old son. I’m currently seeking legal custody as his guardian. As a single “auntie-mommy,â€ how do I determine the best college savings vehicle for him? Also, how can I maximize the tax benefits of saving for college?
It’s great that you’re already mapping out your nephew’s road to college. Some words of caution: Many parents and grandparents–especially in African American families–place such a high value on funding education for the kids in their lives that they sometimes neglect to save enough for their own retirement.
It may sound harsh, but you’d be serving your nephew best by saving for your retirement first. Why? You can borrow money for college, but no bank is going to lend you money to fund your retirement.
Be sure to maximize your retirement savings in an employer-sponsored 401(k) or an IRA. Once you create a viable plan for your own savings, you might look into opening a 529 college savings plan for your nephew. Contact a financial adviser, or open it directly through the institution that administers the plan. These plans offer a menu of mutual funds and other investments. They are state sponsored, but they don’t prevent you from using the funds to pay for college in another state.
As for tax benefits, contributions to a 529 are not tax deductible, but the investments in the plan grow tax deferred, and withdrawals used for the beneficiary’s college expenses are not federally taxed. For more information and to research the top-performing plans, visit www.savingforcollege.com/college_savings_201.
John Simons is the Personal Finance editor of Black Enterprise.