The 529 plan
The 529 college savings program is getting stronger as the industry matures. As with mutual funds, the very best 529 plans have low fees, although advisor-sold plans tend to cost more in fees than direct-sold plans.
Basically, a state-sponsored 529 plan shields investments from federal income taxes and gives grandparents an easy way to boost a grandchild's college fund, and these plans won't harm chances for the child to also get financial aid for college expenses. More than half of the states with these plans also offer a state income tax deduction or credit for contributions to the account. Distributions escape federal income tax altogether if the money is used for qualified educational expenses — mainly tuition, books, room and board. These accounts are flexible, so if one child decides not to go to college, funds can be transferred to another and tax benefits can be preserved. The 529 plan allows families to participate regardless of income, and most states set a high ceiling on allowable contributions — usually up to $300,000 per account.
You can open a 529 plan directly with each state or through a financial advisor. While you'll have to pay administrative and investment management fees, buying directly lets you avoid paying commission fees to a financial advisor. Most states offer a choice of investment tracks that range from conservative to aggressive, and usually parents choose to put these plans on autopilot by selecting age-based portfolios that shift automatically from stock funds to bond funds to cash as the child gets nearer to college age. One drawback to the 529 to be aware of — you can change your investment choices only once per year. And like any market investment, these plans can have ups and downs. It's advisable to set it up and let it grow as a long-term investment for the child's education.
College savings with insurance
Another option is a plan that combines college savings and life insurance in one single plan. You simply save a fixed amount of money monthly for a set amount of time, and during that time the parent has life insurance coverage. The child can use the funds from the plan to follow their dreams, for college or other choices. This is a good option for the risk-adverse because there's no risk of the plan losing value if the stock market goes down, a factor that sets it apart from 529 plans.
Look at local colleges and those in your home state, where tuition will be lower for residents.
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