Several years ago, there were only a few education-savings programs. Parents picked between investing with tax-deferred accounts, such as United Gifts for Minors Act (UGMA) or United Trusts for Minors Act (UTMA), or squirreling money away in taxable accounts.
Today, with options such as the Coverdell Education Savings Account, 529 plans, and state-run Prepaid Tuition programs, parents have a new dilemma: How do they choose among the many college-investing options?
Ideally, you want to choose a plan that will provide the highest investment returns and the best tax benefits. At the same time, you don't want to jeopardize your child's ability to receive some financial aid.
When it comes to the financial-aid issue, consider your own income and future earnings. They will make up a major part of the financial-aid office's decision, and they will be considered more important than assets such as investments or home equity. High-income parents who think their children will qualify for a big financial-aid package simply because the family doesn't keep a brokerage account are sorely mistaken.
When it comes to comparing the various college-saving plans, ask five questions:
- How much can I contribute to the plan?
- What are the plan's investment options?
- What are the taxes?
- Who controls the money?
- Can the money in the plan be used for anything other than education?
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