529 College Savings Plans

The average annual cost of a public college education is now $12,796, and a private university will cost you more than double that amount. You can gradually save for the day that the kids finally leave the roost with a tax-advantaged 529 college savings plan.

Maybe you began saving the day your little bundle of joy was first placed into your arms. But if you're like most Americans, you're not prepared for the rising cost of higher education.

Investing in a 529 plan may be the solution. Far superior to yesterday's Educational IRAs and custodial accounts for children, 529 plans let you pay for college without borrowing thousands of dollars in student loans or writing your impulsive teen a fat blank check.

Investing in education

Investing in your child's education is nothing new. But in years past, many parents diligently invested each year in custodial accounts, only to see the entire amount transferred to their child once they reached the age of majority. Few 18-year-olds can resist the tempting combination of newfound freedom and unfettered access to thousands of dollars in cold hard cash. As you might expect, many youngsters have spent their investment earnings on new cars, clothes, or even day trading.

A better choice is a 529 plan, where parents retain full ownership of the college fund and simply designate a child as the account beneficiary. If the child doesn't use the account for qualified educational expenses, the proceeds can still be used for a different son or daughter.

Prepaid tuition plans

There are two main types of 529 plans available for college financing: prepaid tuition plans and college savings plans. If you've fantasized about the day that Junior will grace the halls of your alma mater, buy a prepaid tuition plan in order to lock in today's rates and avoid tomorrow's skyrocketing prices. These plans can save you thousands. But they're restrictive, so review them carefully to make sure that they're right for you.

College savings plans

College savings plans have fewer restrictions. You can contribute upwards of $200,000 and use the money for most reasonable college-related expenses, including tuition, fees, room, and board. Many plans even cover the cost of textbooks and computers.

It's your money

Some 529 plans will let you claim any unused funds for yourself, although you may have to pay federal tax and a 10 percent penalty on the earnings portion, depending on why the money remains unspent. And if your only child receives a full ride to Harvard? You're probably entitled to a penalty-free exemption.

Tax-free earnings

You can't deduct 529 plan contributions on your federal tax return, but your earnings will accumulate tax-free. Some states also offer a break on your state income tax if you subscribe to a state-sponsored plan.

Ultimately, 529 plans are a wonderful way to finance your child's college education. If you review your financing options carefully, you're bound to find a plan that's right for your family.