By Clark Howard
I want you to know the best way to save for your son or daughter for college. But first remember my rule that you don't save a penny for college unless you are already saving the maximum you can for your own retirement. College can be paid for with grants, loans, scholarships and work. Retirement happens only if you have saved the dough.
That said, I have finished my revisions for 2008 for one of our most popular features on our site, my college savings guide. College savings plans, known as 529 plans, allow you or a relative or a friend to put money aside for a child's college education. The plans grow tax free and are spent tax free for eligible college expenses such as tuition, books and fees. If your child doesn't need the money, it can be transferred to any other child and spent tax free. If your child qualifies for a "free ride" full scholarship for college, you can withdraw the 529 money and use it for anything and just pay tax on the earnings. If your child doesn't go to college and you just take the money for yourself, you pay the tax on the earnings plus a 10% penalty.
When you open an account, your money is invested in a pool much like a mutual fund. I recommend that you look at the investment option available in most plans known as the "age based portfolio." This lets the plan adjust to a more conservative mix of investments as your child gets closer to college age.
Here is something really confusing: Plans must be sponsored by a state even though residents of most states can put their money in any state plan. Even more confusing, a state can sponsor more than one 529 plan. Three states have 5 different plans. I have never found more than one top flight plans in any one state. This is key. When you see your state listed below, make sure you only invest in the exact state plan I show. Otherwise you could end up in a stinker of a plan. I have a direct link for you to the good plan in a state. If you just click on my link below you won't mess up and go to a bad state option.
I have two lists for you. If your state is on either list, choose it, because there may be state tax benefits that would make it a wise choice for you. However, if your state is not listed or you do not qualify for your state tax benefits, put your money in Utah, Iowa or New York. They are my 3 favorite plans in the country because of extremely low costs. First among equals is Utah, the nation's finest 529.
| ***Dean's List with High Honors*** These are the very best plans in the country. Put your money here if your state isn't listed in the Honor Roll. | |
| State | Plan information |
| Utah | Utah Educational Savings Plan Trust |
| Iowa | College Savings Iowa |
| New York | New York's College Savings Program - Direct Sold |
Which investment do I choose?
Most 529 plans allow you to go into an age based portfolio. I like that. The money for your child is adjusted into more conservative choices as your child gets closer to age 18.
Or consider a Coverdell. The Coverdell account allows you to save money for college or private school grades 1 through 12. The money is spent tax free like a 529 account as long as it's used for education. Coverdells limit your contribution to $2,000 per year. Rather than needing a state sponsor you set up your Coverdell wherever you wish: at a bank, a broker, an insurance company, a credit union or a mutual fund outfit. My first choice again would be a low cost mutual fund company. The huge advantage of the Coverdell is the use for private school. The disadvantage is you have to choose and manage your own investment choices.
You can also look at the excellent and versatile Independent 529 plan. You prepay tuition at participating colleges' currrent prices. If your child decides to attend another school, you simply get the return (profit or loss) on your contributions through the years.
So, how do I buy them?
529 plans must be sponsored by a state. All 50 states have plans that are managed for them by stock brokers, insurance companies or mutual fund companies. Most money going into 529s is getting there through what are known as "intermediaries." That means commissioned sales people, stock brokers, financial planners, insurance agents, etc. If you put money in this way you will pay large commissions as high as 5.5% to have your money put aside for your child. That means each dollar instantly becomes 94.5 cents. In addition, many plans have gigantic management expenses that destroy your child's savings. Those expenses are as high as 1.5% or higher.
I recommend that you buy 529 plans direct without commissions and buy low cost plans only. The list above is my honor roll of plans. These are all top plans that are all of equal value and promise. I've listed them in alphabetical order to make it easier to find your state. If your state is listed, buy its plan as you may get a state tax benefit as well. If your state is not listed, don't buy your state plan. Rather pick one of these low cost ones. Most of the low cost plans are run by the nation's two lowest cost financial houses, Vanguard and TIAA-CREF. Remember, with their plans you pay no commissions and management expenses around .50% to .80%.
Good luck!