There are a variety of ways to save for college and the single best way to save is dependent on your financial picture. Regardless of the savings avenue chosen, the single best advice is to BE CONSISTENT! Putting money aside early and maximizing the limits available can make a big difference in the amount saved upon your child’s graduation.
One of the more popular accounts used for college savings is the 529 Plan – a plan that allows contributions to grow federally tax free. Although the contributions themselves are taxed, the earnings are not and this can be significant if invested early. Some of the plans offer residents of that state a state income tax deduction for contributions to the in-state plan and some even offer it for all – resident or not. Keep in mind that this is an investment vehicle and subject to market fluctuations.
Unlike a Coverdell Education Savings Account, the 529 plan does not have income limits, so high income earners are able to take advantage of the tax savings this plan provides. The limits vary depending on the state plan chosen.
Another benefit to this type of account is that the plan is held in the parent or grandparent’s name (the donor), not the student/child. Funds must be used on qualified education expenses such as tuition, fees, textbooks and student housing. If the account is not used in full or even at all, the 529 plan allows for a transfer to another child, grandchild or even yourself!