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It’s Never Too Early to Save for Higher Education

By SHELLEY HANSON

Staff Writer

MARTINS FERRY — When it comes to saving money for college or other higher education options, it is never too early to start, according to the American Institute of Certified Public Accountants.

And there are several options available for parents to consider. For example, the 529 plan, which is named after the number in the federal tax code, allows parents to save money for their children’s higher education without worrying about paying taxes on the interest.

According to the institute, however, there are two different kinds of 529 plans: One is a college savings plan and the other, prepaid tuition plans.

“Both share the same federal tax advantages, and yet they are not the same. With a college savings plan, you can use the funds at any college that’s accredited by the U.S. Department of Education. A prepaid tuition plan can only be used for undergraduate tuition at public colleges in your state,” the institute notes.

The institute notes there are pros and cons to each plan:

The Pros

“Both types of 529s offer Federal and state tax-deferred growth. If the money is withdrawn to pay for college, earnings are not subject to federal income tax. States can add their own tax advantages to 529 plans. A few of them even provide matching scholarships or matching contributions. And 529s are open to anyone, regardless of income level and you don’t need to be a parent to set one up. With a college savings 529, there is no age or time limit on when the withdrawal must be made.”

The Cons

“With a college savings plan, you can choose from a variety of investment portfolios, but you can’t direct the underlying investments. With a prepaid tuition plan, you don’t pick anything — that’s only in the hands of the plan’s money manager. College savings plans don’t guarantee your investment return, plus you can lose some or all of the money you’ve contributed.

“Prepaid tuition plans guarantee your investment return, at the very least. It’s just that the benefits paid out might change due to projected actuarial deficits,” according to the institute. “Using money in your 529 plan for something other than college will cost you a 10 percent federal penalty, plus state penalties.

“You will also pay income taxes on the earnings if the plan’s funds are not used for college — you might even forfeit your earnings entirely. Prepaid plans have a ‘use by’ date: your kid must be college-bound by the time he or she reaches age 30. But both types of 529 plans may charge annual maintenance fees, administrative fees and investment fees.”

Other ways to save, according to the CPAs, can include the Coverdell Education Savings Account, U.S. Savings Bonds, Mutual Funds and Custodial Accounts and Trusts.

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