Tips on saving for grandchild's education

Q. I'd like to start investing for my grandchildren's college education. What is the smartest way to do this?

L.G., Sedona, Ariz.

A Some popular ways include buying US savings bonds earmarked for when your grandchildren are ready to enter college or putting money into an education IRA.

But David Bendix, president of Bendix Financial Group, Uniondale, N.Y. finds problems with both plans. "There is little financial growth in the savings-bond program, compared to growth in the stock market," he argues. And the IRA is limited to a $500 per year contribution.

Mr. Bendix prefers two other possibilities. Have a bank or mutual-fund company set up a Uniform Gifts to Minor's Act (UGMA) plan for your grandchildren. You would be custodian of the funds, but the children would absorb the taxes due at their lower tax rates

One drawback: When the children reach adulthood (usually 18), the money is theirs, whether or not they go to college. So Bendix suggests you simply invest in stocks, maintaining control of the account yourself.

Before the account reaches $10,000, put it in the child's name, assuming you believe the child will use it as you intend. The child will pay the tax when the stock is sold, but probably at a lower tax rate than yours.

Some mutual-fund groups also offer eduction programs such as Fidelity's UFund (800-544-8888). These funds are tax deferred and would be held in your name.

But if the money is not used for college, you'll owe taxes on the account plus a 10 percent penalty.

Q. Is a fee-only financial planner better than a non-fee-only planner? J.R., Los Angeles

A. Not necessarily. The main distinction between the two is in the way they are paid and how that might influence their advice.

Fee-only planners don't accept any outside commissions for recommending a certain type of investment. Consequently, they may charge higher fees than non-fee-only planners, according to "The Consumer Reports Money Book" (third edition).

By contrast, non-fee-only planners may lean toward certain investments from which they derive special commissions.

That's why, experts say, it's important to ask a planner up front how they are compensated and whether they are agents for any specific products, services, or firms.

Questions about finances? Write: Guy Halverson The Christian Science Monitor 500 Fifth Ave., Suite 1845 New York, NY 10110 E-mail: halversong@csps.com