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College Savings for the Whole Family

Here at The Motley Fool, we're celebrating back-to-school days with financial advice for parents, kids, and students of all ages. Check out the entire curriculum right here.

It's a little-known fact that the average adult will have more careers than hairstyles by age 65.

OK, I invented that figure, but it's not so farfetched. Statistics suggest you'll have more than three careers and 10 jobs in a lifetime. (We've been meaning to tell you -- it's time to get rid of that mullet.)

You can't change careers just by picking up a drill and declaring yourself a dentist ... or a carpenter ... or a petroleum engineer. You'll probably have to take a class or two, maybe even head back to school full time. Just like your neighbors with the precocious kindergartner, you might be wondering whether a college savings account can work for you.

Some can, and some can't. Here's a look at your options:

Coverdell ESA. Count this one out. Tax law prohibits contributions on behalf of anyone 18 years or older. These accounts won't help the returning student, unless it's your daughter deciding she's spent enough time perfecting her latte technique, and she's ready to go to college.

529 Prepaid Tuition Plans. Many prepaid tuition plans come with age or grade restrictions on beneficiaries. But if your state offers a prepaid tuition plan without them, take a look. Consider the idea if you know you will return to school in a few years, and you fear the effects of tuition inflation. Think about it, also, if you're too risk-averse to put your college savings in the stock market.

Prepaid tuition plans allow a prospective student or a parent to pay tuition in today's dollars but attend school later. If you had intended to plunk some money into a savings account or a CD, this may be a better alternative. Tuition costs have been galloping up at a rate that virtually no savings account can match; you may get a pretty good return on your investment by locking in your tuition price now. Then you can sit in the back of the classroom and throw spitwads at all those losers who paid more because they didn't plan ahead.

529 Savings Plans. These accounts reside in the same section of the tax code as prepaid tuition plans. (Hence the confusing and seemingly random "529" label attached to both.) If you've looked at college savings options that let you choose among several types of investments, it's likely that they fall into this category.

Consider this idea if you have some time before you plan to return to the classroom, like five years or more. Think about it, too, if you don't mind subjecting your college savings to a little bit of market risk in return for potentially bigger rewards. You've probably guessed where I'm heading here: A 529 savings plan typically puts your money in the market. As with a 401(k) plan, you get a menu of investments to consider, and you choose whatever dish tickles your fancy.

A 529 savings account may be a great idea for Foolish parents who know they want to send their children to college but aren't too sure about their own plans, because the beneficiary can be changed to benefit any family member -- and you may get a state tax deduction, to boot. You'll find more 529 plans than flavors of ice cream at your local shop, so be sure to do your homework and avoid the worst of them.

IRA. You might already have your college savings amassed if you've been diligently squirreling away money for your retirement. Before we even consider the idea, a Foolish warning: Sapping your retirement savings can quickly undermine your plans for an all-expenses-paid beachside retirement. That said, education may mean a much better job and higher salary that you can plow back into your retirement savings. So, if you're thinking about an advanced degree in Monrovian existential philosophy, you might want to reconsider. Otherwise, it's your call.

If you choose to tap an IRA for educational purposes, you can avoid the penalties usually imposed on early withdrawals. If you withdraw money from a Roth IRA, you can take out your original contributions with no restrictions. Make sure to get comfortable with the rules and restrictions so you don't accidentally end up on the wrong side of the IRS.

Related Foolishness:

Learn more about 529s, ESAs, and other educational acronyms with a free 30-day trial of Motley Fool Green Light.No pop quizzes, we promise.

Fool contributor Mary Dalrymple hopes "529" isn't how many thousands of dollars she'll need to send her daughter to college in 2025. She welcomes your feedback. The Motley Fool has a well-schooled disclosure policy.


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