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Saving for College

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Dollars College Savings Plans, also called Section 529 plans, are an excellent way to save for college.  They offer a variety of investment options ranging from conservative to aggressive.  One option is usually an age-based portfolio that invests mainly in stocks while a child is young, and then shifts to bonds and money-market funds as college years come closer.  529 plans are managed by experienced investment companies, such as Vanguard, Fidelity, and TIAA-CREF.

Anyone can contribute money to a 529 plan on behalf of a beneficiary, allowing friends and relatives to give the gift of education.  In addition, the minimum investment amount required to open an account is usually lower than mutual funds require, making 529 plans affordable for lower income families.  Most states even allow you to transfer funds from your checking or savings account to your 529 plans.

529 plans also offer several tax advantages.  Earnings are tax-deferred and are not subject to capital gains taxes.  Redemptions are also exempt from federal income tax if they are used to pay for tuition, room and board, fees, books, supplies, or equipment.

Most states also offer tax advantages if you enroll in the plan for your own state.  In addition, contributions may be deductible on your state income tax.

In addition to these income tax benefits, college savings plans can be a valuable estate planning tool.  The accelerated gift option allows you to average gifts over $11,000 per beneficiary over a five-year period with no federal gift tax.  This means you can contribute up to $55,000 per beneficiary in one year with no gift tax.  Contributions are immediately removed from the donor's gross taxable estate (and included in the estate of the beneficiary).

Most states have their own college savings plans, but you do not have to enroll in the plan in your state.  Look first at the plans in your own state, especially if they offer tax advantages.  Expenses and investing options are other factors to consider as you compare state plans.

For more information about 529 Plans, see An Introduction to 529 Plans.  A 529 Plan variation is the Independent 529 Plan.  Read all about this pre-paid tuition plan.

Estimate the future cost of a college education.  Costs are based on average annual increases and the number of anticipated years spent in school.


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Saving For College - College Savings Plan Guide