Q&A: Saving for your child's college expenses

March 20, 2009

I am interested in starting to save for my two-year-old child's college education. I have heard great things about 529 plans and was wondering if that is the only plan I should utilize?

Q: I am interested in starting to save for my two-year-old child's college education. I have heard great things about 529 plans and was wondering if that is the only plan I should utilize?

A: A 529 college savings plan, named after Section 529 of the Internal Revenue Code, is a tax-advantaged investment program designed to help pay for qualified higher-education costs. The plans can be used for room, board, tuition, and books. The growth and withdrawals are tax-free, unless they're used for something other than college expenses. Participation in a 529 plan does not guarantee that the contributions and investment returns will be adequate to cover higher-education expenses. Contributors to the plan assume all investment risks, including the potential for loss of principal, and any penalties for non-educational withdrawals. Your state of residency may offer tax advantages to those who participate in the in-state plan. So be aware that you may miss out on certain tax advantages should you choose another state's 529 plan. You should consult with your financial, tax, or other adviser to learn more about how state-based benefits would apply to your specific circumstances. You may also wish to contact your home state's 529 plan program administrator to learn more about the benefits that might be available to you by investing in the in-state plan. As a supplement, you might consider a Uniform Transfer to Minor account (which allows minors to own types of property, such as real estate, fine art, patents, and royalties, and for the transfers to occur through inheritance), life insurance cash values, and personally owned stocks and mutual funds if you want to provide additional funds for a private or out-of-state college, or post-graduate education expenses. Note that taking loans on the cash value of your life insurance policy will drop the death benefit.