How to Compare College Savings
College savings plans have ballooned in popularity as college costs rise. States offer many different 529 and prepaid tuition plans. The federal government allows investors the additional choice of the Coverdell Education Savings Account, which complicates comparing plans.
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Limits
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The 529 plans, which are named after the section of the federal tax code that regulates them, cannot allow contributions of more than $200,000 for a beneficiary, making them attractive for many education goals. Prepaid tuition plans mandate fees to pay today guaranteeing tuition prices later. In 2010, Coverdell ESA plans only allow a maximum of $2,000 contributions per year.
Returns
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College costs rose between 6 and 7 percent in 2009 and 2010, according to The College Board website. Investors should compare historic returns of 529 plan options or available funds eligible for Coverdell investment and look for options balancing risk with returns rising faster than college costs. Prepaid tuition plans are guaranteed by the state to cover college costs at today's rates.
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Costs
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Costs erode returns in college savings plans. Investors should compare sales and management fees before purchasing any fund to be used for college savings.
Taxation
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The 529 plans and Coverdell ESAs grow tax deferred. The 529 plans may be removed tax-free for qualifying higher education expenses, and Coverdell ESA dollars may be taken out for K-12 and higher education costs. States often provide a state tax break for residents investing in their 529 plan.
Portability
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The 529 plans and Coverdell ESAs must be used for education expenses anywhere in the United States. Owners incur penalties if funds are used for other uses. Other state college savings plans may be limited to paying for in-state education programs.
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