Ultimate College Guide 2005

529 College Fund Alternatives

Other ways to save, looking beyond the 529 plan.

By Penelope Wang, MONEY Magazine. Additional reporting by Mattie Brickman, Jacqueline Chmielnicki, Derek Manson and Christian Yee.

NEW YORK (MONEY Magazine) - A 529 plan isn't your only college savings option. And in some circumstances, another investment is the better choice.

Coverdell education savings account (CESA)

Investment choices: Broad. Most brokerage and fund companies offer CESAs

The best 529 plans

Contribution limits: Low. $2,000 a year per child. To qualify, your adjusted gross income must be less than $110,000 for a single filer or $220,000 for those married filing jointly.

Tax benefits: Good. Earnings are tax-free as long as they are used for qualified education expenses, which can include elementary and high school costs.

Financial aid treatment: Good. Same treatment as 529 plans.

Best for just about any family, but especially those with substantial elementary or high school expenses.

UGMA/UTMA custodial account

Investment choices: Broad. You can set up accounts at most financial institutions.

Contribution limits: None. But gifts of more than $11,000 per child ($22,000 if both parents contribute) are subject to the gift tax.

Tax benefits: Okay. If the child is age 13 or under; first $800 of income is tax-free, the next $800 is taxed at their rate; any more income is taxed at parents' rate.

Financial aid treatment: Poor. The account is considered the child's asset, so federal aid formulas assess it at a 35 percent rate.

Best for families that don't need aid. If you already have a substantial amount in a custodial account and think you could get aid, spend down the balance.

Taxable account

Investment choices: Broad. You can invest in just about any stock, bond or mutual fund.

Contribution limits: None.

Tax benefits: Also none. But you can keep taxes down by investing in tax-efficient index funds.

Financial aid treatment: Good. Parents retain ownership of the account.

Best for families that hope to get need-based financial aid.

A winning college savings plan: 529 plan tips

Getting started saving for college: Build an A+ college savings plan Top of page

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