What's the best way for you to save for college?

  @Money January 14, 2013: 5:24 PM ET
NEW YORK (Money Magazine)

To help you choose the best college savings option, here's how each plan stacks up in the categories that matter most.

529 COLLEGE SAVINGS PLAN

Maximum contribution:

Annual: Typically, none. But if you contribute more than $14,000 in any given year, you'll trigger gift taxes.

Lifetime: As much as $300,000 in many plans.

Tax treatment:

Federal: Tax-deferred growth, tax-free withdrawals for college expenses.

State: Many states provide tax benefits to residents using their plan.

Financial aid impact: Maximum of 5.64% of value will count against you.

Restrictions on withdrawal and spending: Withdrawals must cover qualified higher education expenses.

Potential problems: Limited investment options. Some states funds have comparatively high expense ratios.

529 PREPAID TUITION PLAN

Maximum contribution:

Annual: Typically, none. But if you contribute more than $14,000 in any given year, you'll trigger gift taxes.

Lifetime: Up to $220,000 in some plans.

Tax treatment:

Federal: Tax-deferred growth, tax-free withdrawals for tuition.

State: Many states provide tax benefits to residents using their plan.

Financial aid impact: Maximum of 5.64% of value will count against you.

Restrictions on withdrawal and spending: Withdrawals only cover tuition.

Potential problems: Some plans are facing financial difficulties and may not have the funds to meet their obligations.

Most prepaid tuition plans require either owner or beneficiary of plan to be a state resident.

PERMANENT LIFE INSURANCE

Maximum contribution: None.

Tax treatment:

Federal: Tax-free access to the cash value of your policy.

Financial aid impact: These assets are not counted against you in financial aid.

Restrictions on withdrawal and spending: None.

Potential problems: High fees; lose money if withdrawals are made within the first few years.

ROTH IRA

Maximum contribution:

Annual: $5,500.

Lifetime: Depends on income.

Tax treatment:

Federal: Tax-deferred growth, and tax-free withdrawal of contributions if used for college. Earnings can be withdrawn tax-free after you turn 59 1/2.

Financial aid impact: These assets are not counted against you in financial aid.

Restrictions on withdrawal and spending: None (10% early withdrawal penalty waived for qualified higher education expenses).

Potential problems: Earnings are subject to income tax and withdrawals can impact future financial aid eligibility.

NEXT: What's the best 529 savings plan for you To top of page



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