If you’re saving for your child’s college, there’s a tool that can help you get it done in a tax-free way.
The best way to save for college is a 529 plan
A 529 plan is the best way to save for your kid’s college. 529 plans — aka college-savings plans — allow you, a relative or a friend to put money aside as an investment for a child’s college education.
The money grows tax-free and is spent tax-free for eligible college expenses such as tuition, books and fees. Now thanks to a new federal law, those eligible expenses have been expanded to include housing, campus dining plans and computers/related technology.
If the child doesn’t go to college, you can transfer the plan to another child for free without being taxed. If there are no other children you want to have the money, you can use it yourself. But beware that you’ll pay a 10 percent penalty plus tax on any earnings if you take this latter option.
Another unique feature of 529 plans is their flexibility. You can put in as little as $15/month. Or a rich grandparent can pop in as much as $70,000 all at once.
Here are the best state-sponsored 529 plans in the nation
529 plans are unnecessarily complicated because they’re all required to have state sponsorship. Yet you’re not limited by where you live as far as making contributions. You may, however, enjoy a state tax deduction if you select your own state’s plan.
Which plan should you pick? Let my guide help you in deciding. All of my picks for 529 plans around the country are sold commission-free. You can buy them directly through the state that sponsors them. I only include plans that charge less than 1% per year to manage your 529 account. The best plans are below 0.4% per year. That means almost none of your money is being diverted to the 529 manager allowing greater savings for your kids’ college.
If your state isn’t listed in the ‘Honor Roll’ section of my guide, pick a state from my ‘Dean’s List.’ There you’ll see plans from California, Utah, Iowa, New York, Minnesota, Georgia, Michigan and Wisconsin. These are the lowest-cost plans available across the board. Utah is by far the single best plan in the country.
One caveat though: Do not save a penny for your child’s college education until you fully fund your own retirement. There are no scholarship plans for your golden years!
Read more: 11 best ways to find a college scholarship
Want more money-saving education advice? See our Education section.