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The Best Way to Save for College: 529 College Savings Plans

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Last month, we talked about how to figure out how much you need to save for your child’s (or your own) college education. The bottom line was that there is no set formula. Rather, the amount you put away is a factor of how much you can afford, what college (or type of college) you anticipate your child attending, and how much other assistance you expect to receive.

I promised you at the time that I’d write a series of posts looking at the pros and cons of the different college savings vehicles. Well, it has taken me a while to get back to the topic, but I haven’t forgotten! Today I’m starting a series on the plusses and minuses of the various tax-advantaged plans.

The most popular of these saving schemes are the 529 College Savings Plans and the 529 Prepaid Tuition Plans. Then there is the Coverdell ESA (or Educational Savings Account), also known as the Education IRA. Finally, there is the little known Uniform Gifts to Minor/Uniform Transfer to Minor ACT (UGMA/UTMA). Today, we are going to be looking at the 529 College Savings Plan.

529 College Savings Plans

What is it: The most popular college savings vehicle, allowing you to save money for college with tax-free earnings and withdrawals.

Pros: Earnings and qualified withdrawals are tax-free; many states are now offering tax benefits for investors as well; no income limits; no age limits; no contribution limits; parent or account custodian retains financial control; account is considered parental asset on FAFSA, so it doesn’t have overly negative impact on financial aid award.

Cons: Over one hundred 529 plans on the market, requiring a lot of comparison shopping. Some have (extremely) high maintenance fees; typically higher level of risk since most plans are heavily invested in mutual funds.

Bottom Line: Carefully compare fees, state tax benefits and other incentives on each possibility before choosing your 529 Plan.

Stay tuned for when I talk about the 529 Prepaid Tuition Plan. In the meantime, tell us: Are you saving for college? Which vehicle have you chosen to save your money?

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