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Finance

The Generous Giver’s Dilemma

Even in today’s slumping economy, parents and grandparents can find great financial gifts for kids.

“[Giving savings bonds] will begin to share with them that, ‘Wow, this was given to you by Uncle Joe and it’s now worth $90, when it was worth $50 back when it was given to you,’” says Pablo Bianchi, a financial planner at Financial Advisors of Delaware Valley in Marlton, New Jersey, and a native of Uruguay. “A lot of times we tend to forget you’ve got to initiate this type of approach [about teaching lessons of saving] at a very young age.”

But though savings bonds offer stability, their current interest rates are measly. EE bonds bought through October 2009 have an interest rate of 0.70 percent. Series I bonds bought through October have a current earnings rate of 0.00 percent. (Series I bonds have an inflation component and the rate changes every six months.)

“I’m not a huge proponent," Guerrero says. "There are so many other options that would probably generate a better return versus savings bonds with the same type of safety.”

Highly rated insured municipal bonds are among those alternatives, says the Los Angeles native of Mexican descent. Visit www.municipalbonds.com to learn how to buy munis and to find bonds for sale.

529 College Savings Plans

Section 529 of the Internal Revenue Code authorizes tax-advantaged savings plans to pay for college expenses. These 529 plans generally consist of mutual funds and may allow contributions of $50 or less, depending on the plan chosen. Each state has different plans, and out-of-state residents can usually purchase any state’s plan.

Investing in 529s requires making predictions for an unpredictable future. For example, what if a child decides not to go to college? “Assuming you make a 529 the primary source for savings, you’re cornering yourself,” says Bianchi, who has 529 plans for his children as part of a larger portfolio.

The plans do offer some flexibility, though. You may be able to switch into more conservative investments as the child approaches college. And a sibling or other family member can become the beneficiary if the child isn’t college-bound. Also, donors can withdraw the assets for non-educational purposes, although they will pay taxes and a penalty on the earnings. You can compare 529 plans at www.collegesavings.org or www.savingforcollege.com.

Safety Reigns

For some folks, like Mayrah Rocafort-Mercado of San Antonio, putting money into a savings account is still the best option. In 2007 the Puerto Rico native opened an education fund account for a granddaughter, who is now 13, with an impressive interest rate of around 5 percent. “I really don’t have any trust whatsoever in the economy,” says Rocafort-Mercado, who consults with corporations and advertising agencies that target Hispanics. Having been bruised by the stock market, she doesn't want to risk losing her grandchild’s money there. “It’s a conservative kind of account,” she says, “and if it will help her with the first couple of years [of college], it will be great.”

These links are provided for informational purposes only. AARP does not endorse, and has no control over, or responsibility for, the linked sites or the content, advertisements, materials, products, or services available on or throughout these sites.

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