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A study by the College Savings Foundation found that more than half of the parents surveyed were unfamiliar with 529 plans or didn't understand how they work. Yet Fidelity Investments' College Savings Indicator found that parents who save in 529s are on track to cover more than half of their children's college expenses.
So perhaps a little explanation of your options will help you get a head start on saving for college.
1. State-sponsored 529 accounts. These are the best way to put aside money for college. Your savings grow tax-deferred and escape taxes altogether if you use the money for qualified educational expenses, such as tuition, fees, books and room and board.
Families (including grandparents, aunts and uncles and even generous friends) can contribute regardless of income; minimum contributions are low and ceilings high. In about two-thirds of the states you can also get a state tax deduction or other tax benefits in exchange for your contributions.
And don't worry. Your savings won't hurt your chances for future financial aid. These accounts are considered parent-owned assets in the federal financial-aid formula, so they're assessed at a relatively painless 5.6%.
You can invest in a 529 plan through a broker, or sign up online with a direct-sold plan and put more of your money to work. The most popular type of investment is an age-based portfolio of mutual funds that becomes more conservative as your child gets closer to college. (Find the best state 529 plan for you.)
2. Coverdell education savings accounts. Like 529s, Coverdell accounts can be used tax-free for qualified educational expenses. But annual contributions are limited to $2,000 per beneficiary, and contributions are phased out altogether when your adjusted gross income is $190,000 to $220,000 if you're married filing jointly (or $95,000 to $110,000 for singles).
You can open an account with a bank or other financial institution and choose your own investments. And there's a bonus: Money in Coverdell accounts can be used to pay for expenses in kindergarten through grade 12, although that benefit is scheduled to expire in 2010 unless Congress renews it.
3. Alternative savings programs, such as Upromise or Futuretrust, deposit contributions automatically to a 529 account when you make purchases through the program. Even if you don't accumulate a lot of money, every little bit helps.
Also, don't discount garden-variety savings or investment accounts. True, you won't realize the tax benefits of 529s and other tax-advantaged programs. But you'll retain maximum flexibility, so you can use the money for your own retirement or some other purpose without penalty if your kids don't go to college -- or if they manage to win that elusive full-ride scholarship.
POSTED BY: Jeff Frese (September 17, 2008 08:47 AM)
A great way to increase 529 college savings is by registering it with Freshman Fund (www.freshmanfund.com). Freshman Fund is like a registry for college savings. Parents go to the site, attach their 529, create a public profile and email friends and family a link where they can contribute directly into the child’s 529 account in lieu of or in addition to the usual birthday/holiday gifts. Great for parents and great for gift givers and it’s environmentally friendly gifting.
DISCLOSURE: I’m the founder of Freshman Fund (www.freshmanfund.com). I was at my niece’s birthday party watching her tear through a pile of gifts taller than she was. At the end of the melee my gift was tossed aside into a pile of other forgotten gifts. I spent a-lot of time and money selecting her gift and I though it was a waste. I told her parents that from now on I was just going to contribute to her college savings. I asked them what website to go to in order to that and none existed. So I started Freshman Fund (www.freshmanfund.com).
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