16 Jul Limiting access to a college savings account

 Q. My daughter is having her first baby. I’d love to open an account for college for the baby, but I want to make sure my daughter doesn’t spend the money for other things. How do I proceed?

A. Good for you for wanting to look out for your grandchild’s future.

Our financial advisors say a 529 Plan is the way to go.

“A 529 plan is a tax-advantaged savings plan run by a state to help those saving for college,” said Kim Viscuso, a certified finanical planner with Stonegate Wealth Management in Oakland. “You can set one up and name anyone as the beneficiary, including a grandchild.”

The part that may interest you the most is that the purchaser of the 529 plan is the custodian and controls the investments until they are withdrawn, Viscuso said. Therefore, your daughter cannot access the money without your permission.

There are no income restrictions on either the owner or the beneficiary of this investment vehicle, she said, and there is also no limit to the number of plans one person owns.

When the money is withdrawn, it’s all tax-free, but only if the funds are used for future education costs. Otherwise, a penalty of 10 percent will be applied to the earnings in the account once they are withdrawn, Viscuso said.

A 529 Plan is a great way to make a gift for the child’s benefit, gain income, gift and estate tax advantages and keep control over the assets, said Peter McKenna, a certified financial planner with Highland Financial in Riverdale.

He said all 529 plans are associated with a state, but you’re free to choose whichever plan you like regardless of your state of residence.

“New Jersey has a decent offering, but New York has a very good plan sponsored by Vanguard Investments,” he said. “New York’s plan is a very low-cost plan, can be started with relatively small investment, can be set up for future investments, i.e. monthly contributions and you can choose an age-based investment plan that automatically lowers the risk of the investments as the student approaches college age.”

If you happen to be a New York state taxpayer, McKenna said, you may also be able to deduct your contribution from your current year’s New York taxable income.

As for the estate planning hook, you can deposit up to $14,000 per year in the account without triggering a gift tax impact, McKenna said.

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This story was first posted in July 2015.