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Question:


I want to start a savings account for my grandchildren. What would you recommend?
-Denise Underwood


Answer:


I would recommend that you prepare to be disappointed. The best that you can hope for these days on short-term bank deposits and money-market accounts is an interest rate of barely more than one percent a year. You could get a higher rate by buying longer-term bonds on your grandchildren’s behalf. Even then, you would be earning 2.5 percent or so on 10-year Treasury instruments or less on shorter maturities, and you would have to remain in the bonds for whatever the holding period is or else risk taking a loss if market interest rates rise and you have to sell. Other possibilities include bonds of less creditworthy issuers or stocks that pay high dividend yields. In each of those cases, you would be taking additional risks, not least of which is that those securities may be too expensive, as their prices have been pushed higher by investors – like you – who are starved for income.
One way to get higher income with lower risk, if your intention is to set aside money for your grandchildren’s education, is to start a 529 plan or Coverdell account. These are savings vehicles that provide tax breaks as an inducement for families to save for that purpose. Because the income and other investment returns are generated tax free, the net amount available to your grandchildren if and when they go off to college will be higher than if your savings had been in a conventional account, all else being equal. Contributions to education accounts sometimes are tax deductible, too, so if you have taxable income, you may be able to give your grandchildren more for the same net, after-tax outlay.

-Conrad de Aenlle



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