What Kind of College Funds Are Best?

KE G,
The 529 is going to be your better bet. It is more likely to increase in value compared to the interest rates you are going to earn on a money market account, especially in this economy. Though the 529 is going to fluxuate when the market does come around in 5 or 10 years the payoff is going to be worth it... If your daughter were to get a scholarship you would be able to transfer the account to another child of yours or neice/nephew if you so wanted. Otherwise you would have to pay the taxes on it but still worth the investment...even if you pay taxes on it instead of using it for educational purposes.

Not an expert but I have them for both of my kids and I work in a bank so I know money markets and I know that they are not worth anything right now.

We use 529 plans for our kids. They give you the flexibility of many investing options and the gains are tax free. Some states give you a tax deduction for your contributions. Also, you can invest in any state's fund - not just the one you are living in. Look for the states with good historical returns. If your child gets a scholarship, your options are to roll the money to another child, or just take the money out and pay taxes on the gain - there is no penalty for withdrawal for other purposes. One alternative to 529 plans is a UGMA (this may have a new name - the old one was Universal Gift to Minors Act). The bonus is that with a UGMA, the money can be used for anything that "benefits the minor" which could be school, weddings, cars, etc. The down side is that the fund is in the child's name and therefore it is legally theirs at age 18 and they have rights to it. That could cause problems, depending on the kid & if they know it exists :). The 529 stays in your name. I'm not exactly sure if & when a UGMA is taxed, but I believe that when it is, it is taxed at the child's tax rate. A financial advisor could help you decide which one is right for you.

I would talk with your tax man--I talked with mine a little this spring, and I believe that 529 plans can be used for anyone in the family--so if one child doesn't go to college or gets a scholarship, another child can use the funds, or you can use it for yourself, or even nieces and/or nephews. So, there is some flexibility. I would consult a professional (who isn't selling funds to you) about the decision, and see what they advise, and also the options available in various scenarios.

My husband and I choose to open a ROTH IRA. That way we werr not locked into having the $, like in a 529, "have to" go to education. So, if our daughter gets a scholarship, choose not to go to college (God forbid) or goes somewhere that it's less than we saved, we can use the money towards our retirement with not taxes or penalties. Win win!

Do you know about Upromise? You can have a 529 through them, but it is also a free program that helps you save for college through participating companies. You sign up at Upromise.com and link your grocery cards and credit/debit cards to the account. Anytime you purchase something from a participating company a small percentage of your purchase goes into your kid's account. It is only mostly cents that go in, but it can add up quickly. I have had my kids enrolled since they were both born and love the program.

If you're planning on having more children a 529 is a great idea because if your daughter doesn't use all of the money, it can be rolled over for the next child to use. The only catch is that it must be used for "educational purposes". So it's not like you can just liquidate it and go on vacation.

If your daughter gets a scholarship and doesn't need the money, I'd have to say that you'll still find a use for it. It's pretty rare that a scholarship covers tuition AND living expenses AND fees AND books. And of course there's the issue of her having to maintain the scholarship (some are renewable based on certain GPA and other criteria, some are not). I earned lots of scholarships, but still had to pay room and board, which is not cheap.

Financial advisers will give you a free consultation on this.

This is something we're just starting to check into. No to a money market for tax purposes. It seems to be better to have it in your name, though, for the scolarships, etc., because those are done in the kid's name. Just a few things we've found.