Saving used to be so much simpler. No matter what
particular goal you were saving for, you did the same thing:
put money aside and figured out how to invest it.
Nowadays, you'll have to learn about special types of
accounts designed for particular savings goals. Want to
save for
retirement? You'll need to decide whether a
401(k) or 403(b) planfrom your employer beats out the
benefits of a Roth or traditional
IRA. And in the college savings realm, 529 plans are
attractive, but choosing among your many plan options gets a
lot trickier.
Alternatives to 529s
There are ways to save for college other than using 529
plans. Opening a
custodial accountfor your child is easy, but many parents
aren't comfortable with turning over the money to their
children when they become adults. A
Coverdell ESAhas many of the same attributes as an IRA,
but contributions are limited to $2,000 per child annually --
a pittance compared to the cost of a college education these
days.
529 plansbring the best combination of desirable traits
to help you save for college costs. Once you contribute to a
529 plan, the income grows on a tax-deferred basis. When the
time comes, as long as you spend the money on qualified
educational expenses, that income becomes tax-free.
Contribution limits are huge, letting you contribute $200,000
or more in total for each child.
What to look for
The tricky part, however, is choosing from the dozens
of 529 plans available. Every state in the union offers a 529
plan, and most of them are open to people from anywhere in
the nation.
To find the best 529, here are some of the things you
should look for:
Low fees. High-priced 529 plan options are
sadly quite common, but there are enough alternatives so
that you shouldn't have to waste money
on costly plans.
Flexible investment options. You'll want
enough choices to put together a solid, diversified
long-term portfolio.
Good performance. Saving for college
doesn't give you much time to recover from mediocre or bad
returns. Even if you start saving immediately after your
child is born, you have less than 20 years for your money
to grow enough to finance your child's education. Don't
waste that time on subpar results.
Tax benefits. Many state 529 plans offer
tax breaks to in-state residents, such as income tax
deductions. It's always worth it to take a look at your own
state's plan first, although you may end up deciding that
it's not the best choice, even despite some tax
advantages.
Let's take a look at a couple of different plans to get a
feel for what's available.
Good, bad, or ugly
One 529 plan I like is Ohio's CollegeAdvantage Plan. It
offers a range of different investments, ranging from
age-based options that look a lot like target retirement
funds for future college students to investments in various
stock funds from Vanguard and other providers. Take a look at
some of the choices:
Investment
Cost
1-Year Return
Holdings of Fund Include ...
Vanguard Windsor II
0.48%
(10.3%)
IBM (NYSE: IBM),
JPMorgan Chase (NYSE: JPM),
Microsoft (Nasdaq: MSFT)
Vanguard Morgan Growth
0.48%
(10.1%) Continued... |