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Types of College Saving Accounts
There are a lot of different ways to save for college. Some methods for saving money for college are not as smart as they used to be. Many changes have been made in various laws over the last decade making once attractive college savings vehicles less beneficial. For example, UTMA and UGMA accounts were often a useful way to shelter some money from taxes and save for college at the same time. However, new limits have severely limited the usage of these accounts.
Another popular method to save for college is with US Savings Bonds. The good news is that, the taxes on Savings Bonds are deferred until they are cashed in. That means that you don't have to pay taxes on the interest they earn every year. Even better, Savings Bonds used for qualified educational purposes can be cashed in tax-free. The bad news is that Savings Bonds now earn fixed interest rates for the life of the bond, and with rates at all time lows, buying a newborn a Savings Bond for college means earning less than 2 percent interest for almost 20 years.
Fortunately, the 529 plan continues to be a great way to save for college and get a tax break along the way. Money in a 529 plan accrues tax deferred. That means you won't pay any interest or capital gains each year. In addition, money withdrawn from a 529 plan account is tax-free when used for qualifying educational expenses.
In addition, the owner and the beneficiary of the account can be different. No more staying awake at night after watching the seemingly annual news magazine report on TV about parents whose young and impetuous 18-year olds ran off for whatever reason and then came demanding the money that was technically in their name leaving their parents nothing to do about it.
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The Best College Savings Accounts
The best college savings accounts can differ depending upon where you live. Each state has at least one 529 plan offering and they all have different investment options and structures. Fortunately, you can open a 529 plan account from any state no matter what state you live in. You can use that 529 plan to pay for college in any state as well, so there is no need to limit yourself to your home state.
However, some states offer a state tax deduction for money deposited by residents into the state's 529 plan. For example, Colorado offers a state income tax deduction for all contributions made into either of Colorado's 529 plan offerings. This means approximately a 4.5 percent tax savings on every dollar contributed. Put $10,000 into little Johnny's 529 plan, and take $450 off of your state taxes. For states with a full dollar for dollar deduction for 529 plan contributions, the home state 529 plan is almost always the best college savings account available.
For states without any tax benefits, most financial professionals -- at least the ones not getting a commission on your 529 investments -- recommend shopping around for the 529 plans with the lowest fees and expenses and best investment options. Look for a 529 plan with no account maintenance fee. There are plenty of options that do not charge an annual fee, so there is little reason to lose $30 per year or more right off the bat.
Some of the best college savings accounts are the Ohio CollegeAdvantage 529 plan and the Utah 529 plan, both of which have low fees and expenses and solid investment choices.
To find the best college savings plan for you, consider visiting Saving For College. It has ratings, comparison charts, and useful information that parents from any state can use.
- IRS Educational Tax Benefits
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