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The Perfect Day to Start Saving for College

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With the costs of college seemingly always on the rise, it's important to start saving to pay for your children's education as early as you can. Fortunately, you have a number of smart ways to set money aside for your kids' college; this weekend, you may even get an extra bonus to get started.

529s on 5/29
On Saturday, the College Savings Plans Network (CSPN) is celebrating 529 College Savings Day. The May 29 date corresponds to the name of the most popular vehicle for saving for college: the 529 plan. As part of the celebration, plans from states across the country are planning events giving additional incentives for people to open new accounts, ranging from cash bonuses to ice cream cones.

The overall goal of the day, however, is to educate people about 529 plans and the choices they have to help them save for college. Too many people have false beliefs about how 529 plans work, and those myths can lead them to make bad choices with their money.

Not just for the wealthy
In particular, some see 529 plans as being solely for the wealthy. But every state has at least one plan, and most have options that let you get started with modest monthly contributions of as little as $25. If you do have more to save, though, they have a lot of capacity; most plans let you put aside $200,000 or more toward each child's education.

There's also substantial confusion about what 529 plan money can be used for. You can use 529 savings to pay for tuition, fees, and even certain room and board costs. Moreover, your child doesn't have to go to a traditional, four-year college to use 529 money; two-year colleges, technical and vocational schools, and even graduate programs qualify. Nor is there any age limit for a student using 529 funds.

If you don't use all the money you set aside, then you have a number of choices. The easiest is to name another person as the beneficiary of the plan, which works especially well if you have younger children who will enter college. In the worst case, you can take out unused money. You'll have to pay taxes and a penalty of 10% on any earnings from the account, but you don't lose your initial contribution or even all of the gains, as some believe.

Picking the right plan for you
Even though you can start accounts with relatively small amounts, 529 plans are a big business for financial institutions. The presence of BlackRock (NYSE: BLK  ) , Franklin Resources (NYSE: BEN  ) , and Legg Mason (NYSE: LM  ) among the companies providing investment management services shows just how important and potentially lucrative the financial industry sees the college saving segment. Increasingly, 529 leaders like Fidelity and Vanguard are facing increasing competition from other institutions seeking to gain new markets and expand existing footholds within various states' plans.

This tool at the CSPN website can help you compare important features of each state's 529 plan to help you pick the right funds. In particular, look for the following:

  • Low fees. Every dollar that a plan provider takes is one less dollar for your child's education. Avoid plans with above-average annual fees on their investment choices.
  • Good investment options. Notice that the number of options isn't as important as whether the plan has the option you like the most. Many good plans include some investment choices you'd never want, but if they have the ones you do want, then that plan may be the right choice for you.
  • Tax breaks. You don't have to go with a 529 plan offered by the state where you live, but sometimes you can get valuable tax breaks if you do. By themselves, though, those tax breaks may not be enough to make up for downsides like higher costs. Be sure to do the math.

Whatever you do, don't let the large number of plans and investment options keep you from starting to save in the first place. The tax-free growth that 529 plans give college savers is too good to pass up, so take advantage of the May 29 College Savings Plan Day to get off on the right foot. Your children will appreciate your efforts.

You only have so much money to invest. Foolish finance expert Robert Brokamp asks the big question: Should you save for your kids' college or your own retirement?

Fool contributor Dan Caplinger has stuck with his own 529 contributions. He doesn't own shares of the companies mentioned in this article. The Fool owns shares of Legg Mason. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy got all its knowledge outside of college.


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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