If you're looking into saving for college costs here's an option to consider: a 529 Savings Plan. Called "529 Plans" for the section of the IRS code where they're detailed, the state-administered plans allow you to either prepay tuition for qualified universities or save funds in a tax-free account to be used to pay higher education costs.
The advantages of 529 Plans include tax-free earnings and withdrawals, no income limitations and high contribution limits - as high as $250,000, versus the annual $2,000 Education IRA contribution.
Each state administers its own program, but you don't have to live in the state of the plan that you choose, or go to that state's public university. If you invest with your own state's 529, you may get state-tax deductions on contributions or exemptions on withdrawals.
You can establish a 529 through a financial planner or manage it yourself.
No two states offer the same investment choices, tax breaks or fees, so you'll need to do your research. A good place to start is www.savingforcollege.com.
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Additional details on 529 Plans
Benefits:
- Allows you to save for higher education
expenses for any child, or even yourself.
- If your child decides not to go to college, you
can name a new beneficiary.
- You decide when distributions are made and
what the funds will be used for.
Limitations:
- To use the money for non-education uses costs
a 10 percent penalty against the account's
earnings, plus taxes on the earnings.
- Minimum/maximum contributions and annual
fees vary.
