Quote:
Originally posted by TexLex
I agree with credit this, VM.
Who knows anything about the different college savings schemes and can explain to a financial idiot what the differences are? In the alternative, who knows of a good website that can do this? The grandparents want to give some money to the kid to invest for him and I need a place to put it. Thoughts?
-T(financial idiot)L
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To answer more broadly than Ty, there are three main types of college savings programs.
First are the 529 plans Ty mentioned. Money placed in the plan grows tax free, at least until the sunset date 2010. They work much like a 401k plan that offers a variety of mutual funds: you put money in the account (although it's not withdrawn pre tax), and then its allocated among one or more funds.
Almost every state has a 529 plan, and many have several. Recent controversies have arisen over high fees associated with some plans, especially ones that have specific tax advantages for residents of a particular state. Since you are blessed to be in a state that makes state income tax considerations pointless, you can cut through a lot of the analysis and go straight to the lowest fee plans. Having looked at this a lot last year, I'd suggest looking at the Alaska T.Rowe Price plan and the Utah Vanguard plan, with the difference being whether you favor an actively managed fund or an index. Personally, I have money in the T.Rowe Price Maryland plan, into which I contribute just enough to take full advantage of the Maryland state tax break ($2000 a year) and the T. Rowe Alaska plan, into which I deposit the grandparent checks (it has somewhat lower fees). I considered the Vanguard plan strongly, but frankly I'm already getting mail from enough different financial companies.
The second option is prepaid tuition plans. This is where you "buy" a semester of tuition at your local state school at today's prices, and the state will let you kid attend (assuming s/he gets in, not that you're worried about that) in X years. Usually, you can invest more or less than a semester, and its just prorated. There is also a consortium of private schools that have a similar scheme. The advantage is that if school tuition outpaces investment returns, you look good. However, the limitations really seem restrictive to my view.
The third option is a Coverdale IRA. This works like an education specific Roth IRA (contributions are post tax, but income is tax free), but it has some additional restrictions from a 529, the three main ones being caps on annual contributions ($2000), the fact that couples earning more than $160K a year can't contribute and the fact it can't be transfered from one beneficiary to another. One big plus is that the tax advantages are not currently scheduled to sunset.
The best web resource on all these options is:
http://www.savingforcollege.com/
It breaks down all the different 529s, plus has info on the other two types of plans.
For info on the private college prepaid tuition plan:
http://www.independent529plan.org/
