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How could a parent help a young child save his scholarship $?


mathnerd
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My son participated in a contest last week and he was awarded a surprise scholarship because the founder of that organization was impressed by DS and wanted to encourage and show his appreciation. I have a check made out to his name from that organization. Since this is the AL forum, I thought some of you might have tips for me on how to save it for DS. Do you deposit it in your child's 529 account or do you have a separate bank savings account for this purpose? TIA.

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I don't know what the tax ramifications would be for that and I don't have any personal experience with it, but the whole point of the 529 is to save without paying taxes. If you don't have to pay taxes, you could put it into a different kind of account for him, perhaps a Uniform Gift to Minors/Transfer to Minors account, or a savings bond that would mature by the time he is ready to need the money.

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Savings bonds are currently paying about 0.1%, which is no better than many checking accounts. If you want it to be used for college, consider a 529 plan or ESA (educational savings accounts/Coverdell accounts). If you do a uniform transfer to minors accounts, when he reaches the age limit (18-21, depending on the state), he can take the money out and use it for anything. He'll also have to pay taxes on it as well, while withdrawals from the 529 would be tax-free. There is no federal tax deduction on 529 contributions, but many states have a state tax deduction.

 

Another thing to consider is that if you open a 529 for him and put the money in, it might encourage you to contribute regularly yourself. We have 529 accounts with Vanguard and they autodraft each money for each of our kids. This means the money gets put in no matter whether I feel like contributing or not.

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My kids just have savings accounts that pay a little extra if no money is withdrawn. Tax is different here but the bank handles the transfer of tax on interest to Inland Revenue and sends you a statement. My kids have been registered to pay rax from 10 days for other reasons anyway so that wasn't hard.

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