How to Start a College Fund for Your Grandchildren

In this clip from “Financial Planning Q&A 60” on Motley Fool Live, recorded on Jan. 26, Motley Fool contributor Robert Brokamp discusses the options grandparents have in setting up a 529 or Coverdell to cover future education expenses for their grandchildren.

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Robert Brokamp: 529s are by far the most popular college savings account, named after a code in the IRS code. Every state sponsors them. You don't have to choose your state's 529 plan but, if you do, you might get a break on your state tax return. Some states allow grandparents to do that. Some don't. So just look. I would say the main drawback for 529s, when it comes to Fools, is that you cannot buy individual stocks in a 529. You can only buy either ETFs or mutual funds. A Coverdell, so it's Cover-D-E-L-L, named after a senator, does allow you to buy individual stocks. The contribution limits are much lower, only $2,000 a year, and there are some income restrictions, but you can get around those. The good thing is you can do both. You can contribute to a 529 and a Coverdell in the same year and they both have the same benefits in that the money grows tax-free as long as the money is used for qualified education expenses.

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