College: Keep On Saving

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College: Keep On Saving

Use tax breaks -- and time -- to help pay for your kids' education.

WHERE YOU ARE: Ten years or less away from college bills with only a few thousand dollars in savings.

WHERE YOU WANT TO BE: Sitting on enough cash to make a dent in college expenses.

HOW TO GET THERE: If you haven't done so already, it's not too late to set up a 529 savings account for each child. Although these plans took a hit in recent months, they still trump most other savings vehicles because they let your college money grow tax-free. If you withdraw the money for qualified education expenses, such as tuition, the money escapes taxes completely. Otherwise, you pay income tax and a 10% penalty on the earnings. Over two-thirds of the states offer a tax deduction or credit for contributions. If your state offers a tax benefit, it's worth setting up an account even if your child will be heading off to college soon.

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You can't manage your investments in a 529, but you can pick the mix of stocks, bonds and cash that best suits your goals. Many parents opt for age-based portfolios, which invest largely or entirely in stocks when the child is young and, theoretically, move to less risky investments, such as money-market funds and certificates of deposit, as the student approaches college age. In recent years, some age-based portfolios stayed heavily invested in stocks even as students entered college, but program managers have since become more vigilant about protecting principal at that stage, says Doug Chittenden, of TIAA-CREF, which manages college-savings plans in nine states.


No matter how you invest, you can normally change your selection only once in a calendar year. But the feds made an exception and allowed two changes in 2009. You can also change the mix once every 12 months by rolling the money into another state's 529 account, and you can rejigger as often as you like by switching beneficiaries (see the box below for our favorite state plans). If you have preteens, aim for a portfolio that combines growth with stability -- say, 60% in fixed-income investments and 40% in stocks. Families with very young kids or toddlers can use their longer time line to load up on investments, such as stocks, that offer the greatest growth potential. The closer the kids get to college age, the more the mix should adjust to short-term and intermediate-term bonds, cash and Treasury bills. Most 529 plans offer one or more safe options aimed at preserving your principal, such as CDs.

Look into a prepaid plan. Prepaid college-tuition plans, which stem from the same provision of the tax code as 529 savings accounts, represent another good strategy -- if you can get in on one. Currently open to new enrollees in 13 states (Alaska, Florida, Illinois, Maryland, Massachusetts, Michigan, Mississippi, Nevada, Pennsylvania, Tennessee, Texas, Virginia and Washington), they let you beat college-cost inflation by locking in some or all of future tuition. Most require that you sign up at least three years before your student enrolls. You can still get distributions if your kid ends up going to an out-of-state school or a private institution. As with 529 savings plans, many states give you a tax benefit on contributions to prepaid plans.

If you expect your student to apply mostly to private schools, consider the Independent 529 Plan. This program lets you lock in tuition and fees at more than 270 private institutions. You buy a certificate that may be redeemed at any member institution for whatever percentage of schooling you purchase. For more information, go to

We Pick the Best State-Sponsored 529 Plans

Stick with the plan in your own state if you get a tax break for contributions.


Low fees. Kiplinger's likes the Vanguard index-fund portfolios in the Illinois Bright Start College Savings Program (direct-sold).

Overall investment mix. Alaska's T. Rowe Price College Savings Plan gives you access to Price's top-notch funds.

Conservative mix. The Michigan Education Savings Program provides a guaranteed-principal option plus portfolios that are heavy in bonds.

Fund selection. The College Savings Plan of Nebraska offers a menu of 20 funds.

Broker-sold. Virginia's CollegeAmerica lists 23 top funds from American Funds.