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While many people consider college savings plans the same as college investment funds, there is a difference. When you save for college using standard bank or credit union accounts, you receive a stated return (interest) at a disclosed rate.
Technically, college investment plans generate earnings based on the performance success—or lack—of the college investment options you choose. You should also evaluate child investment options in light of the presence or absence of tax consequences for earnings and/or withdrawals.
Coverdell Education Savings Accounts (ESA) are one primary form of college planning funds. Formerly called the Education IRA, its lack of advantages, except for tax free income, generated an overhaul in 2002, when it was renamed and restructured. With annual contributions capped at $2,000, you must keep yearly maintenance fees at a minimum to keep your earnings strong. Be aware that the fund balance will be given to your child should it not be used for college. You cannot have the proceeds returned to you.
529 Plans are the other major college investment funds. These are state- or educational institution-operated college investment options named after Section 529 in the IRS code. Even though state-supervised, this child college fund does not prohibit your child from attending an out-of-state university. You have two choices: Savings plans that work like IRAs or Prepaid plans, allowing you to pre-pay expected college costs for in-state schools.
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