Dec 21, 2008 9:01 pm US/Pacific
FDIC-Insured College Funds
Question: My question is regarding college funds. I went to the bank today to start a college fund for my 18-month old son and they told me that the 529 college funds are not FDIC insured, which they explained means that the funds are not guaranteed. Do you know of any better way of preparing for my son's college education?
Answer: If you feel you need FDIC insurance for your educational savings vehicle, I would recommend a Coverdell Savings Account. A Coverdell account can also be used for higher education, where the withdrawals are tax free for qualified educational expenses. This could be opened through the bank with a Certificate of Deposit being the investment of choice.
However, because your child has roughly 17 years until he/she will be enrolling in college, I would take a second look at investing the money within either a Coverdell Account or a 529 plan. Yes, the investment can fluctuate! However, you can choose an option that coincides with the year you believe your child will begin using the money. The fund will automatically begin shifting towards a more conservative allocation the closer your child gets to the date in question.
You are potentially starting this plan after the market has had a significant decline. Without knowing the future, I believe that the stock market will outperform risk free CDs over the 17 year time horizon you have until your child would begin college.
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Money Matters is provided by:
David Schauer, CFA, MSFA, CFP®
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Hanson McClain
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