Education Investments
The earlier you start planning for college, the easier it can be to pay those tuition bills.
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 The best time to start saving for
college — for your children, nieces, nephews, or other family and friends
— is as soon as they're born. But if you didn't get off to a quick start,
don't despair. You can start now by choosing among a number of different
investment plans that not only provide the opportunity for your savings to
compound tax deferred but offer the possibility of tax-free withdrawals for
qualified expenses when the student enrolls.
In fact, some of these plans weren't introduced
until 1995, and their tax-free withdrawal provisions weren't added until 2002.
Other plans have been adapted over the years to increase contribution amounts,
make them accessible to more people, or expand the way the money can be
used.
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529 PLANS
 The college savings plans known as 529
plans are among
the newer ways to invest for college. These plans are sponsored by individual
states and managed by financial institutions, such as brokerage firms, insurance
companies, and mutual
fund companies. When you set up an account,
you designate a beneficiary for whom you'll use the money to pay qualified
higher education expenses, including the cost of technical or trade school,
college, or graduate school. The beneficiary can usually be anyone, including
yourself.
Since every state offers at least one 529 plan, you have the flexibility
to choose the one that best meets the criteria you set. In fact, you can
open more than one 529 plan for the same beneficiary if you choose, since
in most cases neither you nor the beneficiary have to live in the sponsoring
state to participate in its plan.
Among the things you'll want to consider in choosing a 529 plan are:
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The investment options and their historical returns
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The fees, expenses, and state tax treatment of different
plans
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Beneficiary rules
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Contribution limits
 You may want to begin your search by investigating
the plan sponsored by the state where you live, as many states offer extra
incentives to residents enrolling in their plan. Your withdrawals may
be free of state as well as federal income tax, for example. Or you may
be entitled to deduct your contribution on your state tax return. But
you may lose those advantages by choosing another state's plan. For more
information on the provisions of specific plans, you can check www.collegesavings.org,
a website sponsored by the College Savings Plan Network.
Remember, though, that as with any uninsured investment,
returns on 529
savings accounts are not guaranteed and you could lose money, especially
in the short term.
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PREPAID PLANSYou may also consider a prepaid tuition plan, another
type of 529 plan. With a prepaid plan, you pay for future college costs
by buying tuition credits at today's rates. The catch is, some of these
plans don't guarantee that your prepayment will cover the full cost when
your child enrolls.
Most of the plans are sponsored by individual states,
and the credits apply to public institutions in the state. There's also
an Independent 529 Plan, sponsored by more than 200 private colleges and
universities. Credits you purchase through the Independent plan are guaranteed,
and they can be used at any participating school.
ON THE RIGHT TRACKMost 529 college savings plans offer either age-based
or fixed tracks, or both. An age-based track allocates your investment
across different asset classes based on the beneficiary's age when you
open the account, and then reallocates to create a more conservative portfolio as the child gets closer to college age.
With a fixed track, you choose whether to invest in
equities, fixed
income,
balanced, or stable value funds. The portfolio's exposure to risk doesn't
change over time, and the results are based on how the underlying
investments perform.
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COVERDELL
EDUCATION SAVINGS ACCOUNTS Like 529 plans, Coverdell
education savings accounts (ESAs) offer tax-deferred growth and tax-free withdrawals when you use the money to pay for qualified education expenses.
With ESAs, that includes expenses incurred in grades K through 12, as
well as college and graduate school.
With an ESA, you choose the investments for your account, which gives
you more control over how your money is allocated than you have with most
529 plans. There are limitations, though. Instead of investment ceilings
that can be $300,000 or higher as they are for some 529 plans, annual
ESA contributions per beneficiary are capped at $2,000. There are income
limits governing who can contribute to an ESA. And the beneficiary must
be younger than 18 when the account is opened, and must use the money
before turning 30, although you can change beneficiaries to another member
of the same family.
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US SAVINGS BONDS When you redeem certain Series EE or
Series I US
savings bonds to pay for qualified education expenses, you
may qualify for a tax break. Series I bonds are sold at face value and
indexed for inflation. Older
EE bonds earn interest at 90% of the market yield on five-year Treasurys.
EE bonds issued after May 2005 earn a fixed rate of interest and are guaranteed
to double in value in 20 years.
There's a small catch to the tax break for education expenses on US savings
bonds: Your adjusted gross income must be less than the limit set by Congress
in the year you withdraw to qualify for the tax-free benefit. Of course,
there's no way to predict what that amount will be when you are ready
to use the money. But you're free to hold on to the bonds if you don't
qualify or cash them in and pay the tax that's due. In that case, you
can spend the money for nonqualifying expenses if you wish, without penalty.
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| EVALUATE YOUR ALTERNATIVES
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© 2006 by Lightbulb Press, Inc.
All Rights Reserved.
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Evaluate 529 college savings plans to find the ones with the most attractive
investment alternatives at the lowest cost. You may want to start by
investigating your home state's plan. 
Don't plan on raiding your retirement plan to pay for college expenses — your
beneficiary could receive grants or scholarships, but you alone are responsible
for your retirement.
