The good news for now is that just about anybody can open one of these for anybody else…grandmas, uncles, future sugar daddies or any other interested parties and earnings are tax deferred and withdrawals are tax-free if you use the money on qualified education expenses. For now anyway, legislation is pending. If Congress votes against you, earnings would be taxed at your child's tax rate when you take money out of the plan after 2010.
Thing No. 1 Easy does it on the excessive annual
contributions.
Anything over $11,000 ($22,000 for a couple) is subject
to gift tax laws.
Thing No. 2 Choose an age-based portfolio.
These are preset
funds that automatically shift from stocks to fixed income as your
child approaches college age. If, for whatever reason, you’re not
crazy about the age-based portfolio strategy then at least stick close
to the middle road with mutual funds. You really don’t want to be
constantly checking stock performance nor do you want to pay high fees.
Thing No. 3 Check out what is available in your state.
Every state has a different plan and some have multiple plans. For a
state-by-state list go here: money.cnn.com/college_guide. Tax deductions for contributors vary by state. (Sometimes only
the person that opened the account can get the deduction, sometimes,
the contributor has to live in the state.) If your state doesn't offer
a decent deduction there's no reason not to shop nationally. You
don’t want to sign up for a crappy plan just to get a small deduction.
Check savingforcollege.com to see which states got it going on and
which don’t.
Thing No. 4 Compare fees.
We’ve seen plans that have annual
expenses of as much as 2.82 percent. You should look at plans that
charge 1 percent or less and unless you’re getting a great tax break,
it shouldn’t cost more than 0.65%. If you’re really lucky, they
can go as low as 0.4 percent. We at Five Things are not in the business of
telling you which one is best (just what you need to know before you
dive in) but, for recos from CNN on the best plans, go here: money.cnn.comfeatures/college_guide best
Thing No. 5 Track records don’t mean much.
Most of these
plans are fewer than four years old anyway. Look at the history
of the fund manager instead.
Thing No. 6 Maybe you have enough free miles.
Some of
the investment banks have credit cards that deposit 2 percent of every
purchase into a 529 up to $1500 per year. (That shouldn’t be too
hard to rack up – it could pay for some books. Besides, it’s getting
damn near impossible to use those freaking miles anyway.) Apply for a
Fidelity/MBNA credit card @ fidelity.com/planning/college
Thing No. 7 Me first.
Make sure your retirement plan is
covered first. There are other ways to pay for college. Not
so much for retirement.