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Also: Answering a reader’s question about using 529 money to pay for K-12 education

The Best Way to Save for College if You Think 529 Plans Are Too Restrictive

Plans owned by grandparents or other relatives do not have to be reported. Dealing with the risks: Many plans offer target date funds that move away from stocks toward safer bonds as college approaches. Even with the risks, the rewards can be substantial across the socio-economic spectrum. Prepaid plans are also worth a look: There are only 11 plans open for enrollment these days.

States ran into trouble during the downturn when their investments lost value and tuition climbed faster than anticipated. As a result, many shut down their programs or closed enrollment.

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Most plans only cover in-state tuition and fees, so if your child decides to head out of town, the money would have to be rolled over to a sibling staying close to home. What is a plan? Start Saving Today Log In.

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The funds you save in a mutual fund can be spent on anything — cars, airline tickets, computers, etc. Earnings in a mutual fund are subject to annual income taxes. Any capital gains are taxed when shares are sold.

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Mutual funds assets owned by a parent will reduce financial aid eligibility by up to 5. Money saved in a custodial account can be spent on anything — cars, airline tickets, computers, etc, as long as the funds are used for the benefit of the minor.

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There is no limit as to how much you can invest. Prepaid tuition plans let a saver or account holder purchase units or credits at participating colleges and universities usually public and in-state for future tuition and mandatory fees at current prices for the beneficiary. Prepaid tuition plans usually cannot be used to pay for future room and board at colleges and universities and do not allow you to prepay for tuition for elementary and secondary schools. Prepaid plans are not guaranteed by the federal government. Some state governments guarantee the money paid into the prepaid tuition plans that they sponsor, but some do not.

It may only pay a small return on the original investment. Withdrawals from education savings plan accounts can generally be used at any college or university, including sometimes at non-U. A saver may typically choose among a range of investment portfolio options, which often include various mutual fund and exchange-traded fund ETF portfolios and a principal-protected bank product. These portfolios also may include static fund portfolios and age-based portfolios sometimes called target-date portfolios.

Typically age-based portfolios automatically shift toward more conservative investments as the beneficiary gets closer to college age. If you are using a account to pay for elementary or secondary school tuition, you may have a shorter time horizon for your money to grow.

You also may not feel comfortable taking on riskier or more volatile investments if you plan on withdrawing the money soon.

This is the best way to save for college. And hardly anyone uses it.

Because of these things, you may consider different investment options depending on when you plan to use the money that is invested. State governments do not guarantee investments in education savings plans. Education savings plan investments in mutual funds and ETFs are not federally guaranteed, but investments in some principal-protected bank products may be insured by the FDIC. As with most investments, investments in education savings plans may not make any money and could lose some or all of the money invested.

What fees and expenses will I pay if I invest in a plan? It is important to understand the fees and expenses associated with plans because they lower your returns. Fees and expenses will vary based on the type of plan education savings plan or prepaid tuition plan , whether it is a broker- or direct-sold plan, the plan itself and the underlying investments. | An Introduction to Plans

Some of these fees are collected by the state sponsor of the plan and some are collected by the plan manager. The asset management fees will depend on the investment option you select. Investors that purchase an education savings plan from a broker are typically subject to additional fees, such as sales loads or charges at the time of investment or redemption and ongoing distribution fees.