Four Basic Ways to Save for College, Part 4

Here's part 4 of a series highlighting a handy interactive chart from MSNBC on the four major ways to save for college expenses:

529 plans

These plans are specifically designed for college savings. They're open to anyone, let you set aside more than a Coverdell plan, and you maintain control over the money while enjoying significant tax breaks. Some plans let you "pre-pay" tuition at today's rates. There are over 100 different state-run plans, with varying fees and features, making the selection process complex and time consuming.

Limitations

Contribution limits -- Up to $269,000, depending on plan.
Income limits -- No.
Use of funds -- Qualified higher education expenses.

Taxes

On investments -- Taxes deferred until withdrawal.
On withdrawals -- No federal income tax on withdrawals for qualified expenses. Some states also give tax breaks. Nonqualified expenses incur income taxes, possible penalties.

Changes

Beneficiary -- Can change to another family member.
Investments -- Most plans allow once a year.
Switch money back to your name -- Yes, but you'll be hit with income tax and penalty.

I currently don't have a 529, but I'd love to. Why don't I? Look at the last sentence in the first paragraph above. The plans have varying fees and features, making the selection process complex and time consuming. Each plan is so convoluted, it's hard to evaluate them. And if I can't evaluate something, I'm not going to put money in it. Besides, I'm not sure 529s aren't in for a major round of changes in the near future (based on their current problems/issues) and I want to wait until things settle out before I jump in.

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Comments

[Janet Dodson]

Hello

I was told you could open a Roth account for your child and contribute and they can use that money later for college or if they don't go to college it will grow towards their retirement? Is this right?

I am trying to decide how to seriously start saving for college. A little bit late with four kids ages 12, 10, 6 and 2yrs, but they save never to late to start. Any advice?

Thanks

[FMF]

Janet --

My best suggestion would to read the wide variety of pieces I have on saving for and saving on college. Here's a list of the best ones I assembled a few months ago:

http://www.freemoneyfinance.com/2006/09/best_of_free_mo.html

And here's a list of all of them:

http://www.freemoneyfinance.com/college/index.html