Want to save for college, but not sure what type of account to use? State-sponsored 529 plans should definitely be your first choice. You don't have to pick one from your own state, but tax incentives might encourage you to do so. If your state doesn't off good tax incentives for colleges savings, then look for the plan with the lowest fees. Kiplinger's gives you an excellent overview of your options, as well as a state by state run down.
These state-sponsored plans can give you shelter from both federal and state income taxes, as well as give your child's grandparents a good way to chip in for their grandchild's education. In fact a grandparent can contribute up to $12,000 a year without having to worry about federal gift taxes (a couple can contribute up to $24,000 without gift taxes). If one grandchild decides not to go to college, just switch the account into the name of another child that wants to go. The money in the fund grows tax-deferred and as long as you only use it for qualified educational expenses you don't ever have to pay taxes on the gains.
You also don't have to worry about saving too much. The federal financial-aid formula assesses parent-owned accounts at 5.6%, while student savings can be assessed a whopping 20%. But, if you want to avoid taxes you must use the funds for qualified education expenses, so you don't want to save more than you think your child will need for college.
The choices can be daunting, so many people chose to work with a broker. But most states allow you to invest directly without going into a broker plan, so why pay someone a 5.75% commission when there are some excellent plans you buy directly from TIAA-CREF and Vanguard. Check out Kiplinger's state by state choices as well as its top five picks.
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Reader Comments (Page 1 of 1)
11-12-2007 @ 3:41PM
sally said...
Watch out for the fees on these 529 plans as they could eat up your tax savings.
11-12-2007 @ 6:55PM
bernard zweig said...
Dear Editor,
In your article "529 Plans great choice for College Savings, But Pick Carefully" November 12, 2007,Lita Epstein referred to 529 plans and their
merits in helping grandparents & parents to prepare for paying the high cost of a college
education for their grandchildren & children.
I'm sure that your readers would like to know that a popular website
www.529andmore.com is a resource for information on 529 plans. The site
also provides an approach for
funding higher education utilizing a unique patent-pending life insurance
policy from which the funding to pay for college can come while the insured
is still alive.