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Where to Stash Your Baby's Cash

Laura Moran

Grandparents, aunts, uncles and even family friends often give the gift of money to newborns as their very first birthday present. But it isn't always easy for even seasoned professionals to manage their money, so what can be expected of a sleep-deprived new parent?

Most parents are left to handle their children's money until they are ready to head off to college. A number of vehicles are available to parents, and the decision can sometimes be confusing. The most popular options include savings accounts, CDs and 529 plans.

So let's say that your newborn has received a gift of $10,000 in cash. Putting that money in any savings vehicle will be beneficial -- some more so than others, says Steve Fisher, a certified financial planner at Independent Wealth Management in Traverse City, Mich.

Fisher says it is safe to assume a 3% return on a savings account, a 5% return on a CD and an 8% return on a 529 Plan. Therefore, in 18 years, when that child is ready to begin college, the original $10,000 will be worth $15,734, $21,153 or $39,960, respectively. The money invested in a 529 plan is almost double that in a CD and more than double that in a savings account.

"We encourage all families to consider setting up a 529 account as soon as the new family member arrives," says Liz Robinson, vice president of marketing at Upromise Investments. "Families should do their research into the programs available to them, including the associated costs and incentives such as tax advantages that may exist in their home state."

The 529 plans offer two plans to potential investors: prepaid and savings.

Prepaid tuition plans are offered by the state and allow people to purchase tuition credits at today's rates; these credits can then be used in the future. Meaning, if the prices go up, the state will pay for the increase. And according to a study done by CollegeBoard, the question is not if but when. The study reports that the average cost of tuition for both private and public four-year institutions was up 6% from 2006.

However, the prepaid route has one downfall: They are generally linked to a specific school or state. So for parents who are unsure of where their children will want to spend their college years, it may be safer to invest the money in a 529 college savings plan.

The savings route, as opposed to the prepaid route, allows people to deposit money for higher-education costs into a tax-deferred account. Only money used for qualified higher education expenses is valid for a tax deduction, but other money can be withdrawn from the account and be taxed at any time. According to Jeffrey Coghan, director of 529 programs at The Hartford, the accounts can be opened by anyone -- a grandparent, aunt, uncle, family friend or stranger.

A 529 savings plan opened by someone other than a child's parents is good, because that money will not be counted against a family's financial aid application. So instead of giving a child cash at birth, it may be more beneficial to open an account for him or her.

It is also important to remember that a child doesn't need $10,000 in his or her name to start saving for college; 529 plans can be opened with any amount of money. Even the smallest bit can help, and it will grow over the years.

According to Sallie Mae, the nation's leading student loan company, even moderate regular contributions can add up to big savings over time. A family who saves $4 per day for 18 years, for example, will have more than $26,000 by the time their child is ready to head off to college.

Robinson says the most important thing to remember is that it is never to soon to start thinking about a baby's education. "Like any other investment vehicle, history shows us that you should start saving as early as you can."