The 529 savings account is a state-sponsored investment account that allows you to put aside money for college. If you have multiple savings accounts for different children, you are able to move the money from one account to another. In addition, the account is tax-deferred and tax-free when withdrawn to pay qualified education expenses. The account may also be deductible on your state tax return. When choosing a 529 account, pay attention to the fund's commissions, fees and performance. Check the Resources section at the end of this article for a link to compare different 529s. Returns on 529s can be volatile, however, and do fluctuate with the stock market.
Some colleges allow you to lock in future tuition at current rates. If your child is not accepted or will otherwise not be able to attend that college, you will be able to withdraw the money. Prepaid tuition plans are tax-deferred and remove investment risk. However, they cover only tuition, not room and board expenses.
U.S. Savings Bonds purchased after 1989 can be redeemed tax-free when you, your spouse or dependents use the proceeds to pay college-related expenses. This option is safe, as long as the U.S. government doesn't default, which is a far-removed possibility. However, the returns are typically low, and tuition-fee inflation can be higher than the interest rate.
In the United States, custodial accounts can be created under the Uniform Transfers to Minors Act and Uniform Gifts to Minors Act. Custodial accounts are opened in the child's name, and any income is taxed at the child's rate rather than the parents' higher rate. However, these accounts are considered by colleges to be students' financial assets, so your child may not be able to get the financial aid for which he or she would otherwise be eligible.