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3 Investment Options for Investing in a College Fund

written by: Jason C. Chavis•edited by: Laurie Patsalides•updated: 3/26/2010

While there are many opportunities to save for a child's future education, achieving the best return on your investment is always a challenge. Thankfully, the American tax code offers 3 investment options for investing in a college fund tax free with the ability to generate interest.

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    529 Qualified Tuition Account

    One of the foremost of these 3 investment options for investing in a college fund is known as a 529 Qualified Tuition Account. Named after section 529 of the IRS Code, this investment option garnered much attention from families looking at saving for college following the Economic Growth and Tax Relief Reconciliation Act of 2001. 529 plans are exempt from federal income tax, however, they also provide a number of advantages to investors such as matching grants at the state level and protection from creditors.

    Two types of 529 investment plans are available for those looking for college savings: prepaid and savings. Prepaid plans are beneficial because they allow investors to purchase college credits at today's prices. Essentially acting like stock options, they allow parents or others to put money aside in an account for the price college costs at present, mitigating the rising costs of tuition. The other form of 529 plans, the saving option, acts much like a mutual fund. The investment generates profit over the duration of the investment based on market performance. 529 plans are designed to slowly become more conservative as college age approaches, preventing major losses to the fund.

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    Coverdell Education Account

    Named after the late Senator Paul Coverdell, the Coverdell Education Savings Account is geared towards helping cover the cost of future education in post-secondary school such as tuition and books. The law is upheld by the IRS Code 530. Like a 529 plan, a Coverdell Education Savings Account is a tax deferred investment and allows tax free withdrawal. However, as on the 3 investment options for investing in a college fund that offer a unique advantage, the Coverdell account can be used for elementary and secondary education as well as college.

    Those investing in a Coverdell account are limited to $2,000 per child per year as of 2010. The investment can be any form of stocks, bonds and mutual funds and must be disbursed by the time the qualifying child is 30 years old. One of the largest bonuses of a Coverdell Education Savings Account, however, is that it is not considered the property of the child when they are applying for school. This means that the money in the account is not factored into scholarship and need-based grants.

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    Crummey Trust

    A seldom-used investment option for college is the Crummey trust. Due to a loophole in tax law, minors are able to receive financial gifts that are excluded from the unified gift and estate tax. Basically, investors can make a gift of up to $13,000 as of 2009 to a minor. The minor has 30 days to take charge of the funds, otherwise the money is placed into a trust until they are 18. If the minor takes charge of the money, the unified gift and estate tax is assessed. However, if it is not, the trust receives the money and can use it to make investments in stocks, bonds or mutual funds on a tax-free basis. The Crummey trust is most traditionally used as an investment tool when larger amount of finances are available that do not qualify for either the 529 plan or Coverdell Education Savings Account.

    These 3 investment options for investing in a college fund allow a way for families and individuals to save money without the burden of taxation. This enables people to make a stronger investment in their child's education while gaining interest in the interim.

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    Resources

    "The College Savings Super Page" Supermoney: http://www.smartmoney.com/personal-finance/college-planning/the-college-savings-superpage-12684/

    "Your Guide to Saving for College" Saving for College: http://www.savingforcollege.com/