Since 2002, state-sponsored 529 college savings plans have become a very popular way to invest money for a kid's future college education. As long as the proceeds are used to pay for college & secondary education expenses, 529's are federal tax-free; depending on the state which oversees it, a 529 can also be state-tax-free, and contributions into the fund may be tax-deductible. [Tax-free means that income earned from the fund is not taxed every year, but allowed to remain in the fund to compound and accrue that much more quickly. Tax-free when it you take money out means that you don't pay taxes on it then, either, as long as your use of the money meets the required conditions of educational expenses.]
Anyway, because anyone can set up a 529 for a kid--parents, grandparents, friends [gee, can I be your friend?]--they're popular vehicles for gift-giving/wealth-transferring, too. The typical $11,000 /yr tax-free gift limit applies for 529's, but a person can also give $55,000 at once, tax-free, and count it as 5 years worth of gifts. Helps compound faster that way. Unlike trusts, 529's remain in the control of whoever establishes them, even though they can only be used for a single designated kid.
This 2002 article from USA Today outlines a lot of the challenges and traps of investing in 529 plans. As with many investment vehicles, a lot of funds have spotty performance and/or unjustifiably expensive fees; a lot of financial advisors have conflicts of interest they don't disclose; and choosing among the state-by-state grid of investment options can be rather complex.
Last December, Metafilter-ites discussed some issues and options of investing for a 6-month-old's college education; it's useful to add the layman's perspective to your research pool. [via matt haughey]
the College Savings Plan Network [collegesavings.org] is a useful place to start researching 529's; it's membership is comprised of state treasurers and other officials responsible for college savings. There's no obligation, and no salesman will call on you.
Saving For College [savingforcollege.com], meanwhile, is a subscriber-based fund advisory, rating, and information resource. A lot of its potentially useful info is behind the subscriber wall, so I have no idea how it is. [Any users out there? Any other solid resources or approaches you've had good experieince with? Or things to definitely avoid?]
And don't forget to sign up for Upromise. If you use any grocery/pharmacy loyalty cards, buy things online, or eat out there are opportunities to get corporate America to kick a few pennies back into your kid's 529.
One thing to be wary of, I believe the tax-free aspect of this plan is good only so long as congress keeps renewing it (someone correct me if I am wrong). If so, then just because it is tax free now, doesn't mean it still will be when your little one goes off to college.
and the way the country is leaking money... who knows...
but don't get me wrong, I think they are still a good savings vehicle, I just think everyone should know.
[right now there's a sunset provision built in, so that the 529 tax-free thing ends in 2010, two presidents from now. Meanwhile, states are always tinkering with the laws governing 529's, such as imposing state taxes if you switch funds, or if you have out-of-state 529 earnings. the understatement of the day: complexity.
On the other hand, 240 private universities have joined to offer 529 plans combined with pre-paid tuition/tuition lock-in. The list includes Princeton, Stanford, Arcadia College (formerly known as, oh, never mind.) There should be a 529 blog that would-- just a minute, I'll be right back. -ed.]
Thanks for the links. We keep meaning to get started on this.
Too bad we can't hedge against future K-12 curriculum "reforms". You know, like doing away with evolution. We're in the south; it's a real concern :-(
[there's always homeschooling... -ed.]
Homeschool--Yes, sigh, that's the most obvious solution. But so not my scene.
It may come to that now that the vatican is reverting to the superstition-laced pre V2 belief systems of Pope Bennie.
Parochial school was to be our last resort before actually having to move out of state. Bah.