Easing the Pain of College Saving

It’s tough to save in any economic climate, and tougher when freight is slow. So if you can muster the discipline to stash a little bit away for your child’s education, you want to choose an investment that pays well, minimizes tax payments and gives you maximum flexibility.

“Now, states have their own investment plans,” says Todd Sobel, a planner with Solomon Smith Barney in Birmingham, Ala., speaking about Section 529 College Saving Plans. These generally offer more returns and greater control than education IRAs, savings bonds and Uniform Gift to Minor Act accounts.

The 529 plans are usually managed by a mutual fund company hired by the state. These plans vary from state to state but have some things in common:

YOU GET A GOOD TAX BREAK. You pay no federal taxes on earnings and none on withdrawals for college costs and certain qualified costs. Certain states offer additional tax breaks, such as allowing you to deduct your contributions.

YOU REDUCE YOUR PAPERWORK HASSLES. No tax forms are required until withdrawals are made.

YOU HAVE FREEDOM OF CHOICE. You are not limited to participating in your home state’s plan, nor is your child limited to using the money for schools in your state.

YOU HOLD THE REINS. With 529 plans, you retain full control. Custodial accounts, depending on the state, automatically belong to the minor upon the 18th or 21st birthday – even if Junior would rather get high than get a higher education.

YOU CAN CHANGE THE RECIPIENT. “Say your kid doesn’t go to college,” says Sobel. “It can go to your grandkids. Or a first cousin.” Or to you – assuming you plan to continue your own education.

There can be some complications. For example, transferring funds to a 529 from an education IRA or a custodial account can be done, but you should check with your accountant about ownership issues. Also ask about gift and estate tax implications.

If your cash flow is so tight that saving seems out of the question, consider at least a monthly draft from your checking account. Even the smallest amounts, invested regularly and growing tax-free, can reap dramatic growth as the economy rebounds.