Getting Educated About 529 Savings Plans

The Bad and the Ugly

The way the current law is written, the ability to withdraw earnings tax-free will disappear in 2011, although most pros believe that the folks in D.C. will extend this perk.

If by chance, Congress does not allow it (fools), then you'll still most likely get the benefit of the tax-deferred earnings, but your child would then owe tax on the earnings at withdrawal, says Matt McGrath, senior VP at the financial planning house of Evensky & Katz in Coral Gables, Fla. But it's likely that your kid will be in a lower tax bracket, so the tax hit might not be so bad.

And remember, if Junior doesn't go to college, and you don't have anyone to turn the account over to, you'll owe a 10% penalty on the money plus tax on the earnings. You can always redirect the account to another student -- including yourself -- but you can't take the money out to fund your child's cross-country trip, as educational as that may sound, without incurring the penalty.

Researching these plans can get overwhelming. With more than 50 plans available, where do you begin?

First, go to the Web and start learning. Savingforcollege.com is a great place to start. There's a great calculator that will clue you in to how much money you're really going to need.

After you scrape yourself off the floor, look to your own state's plan first, suggests Joe Hurley, the Web site's founder. If the plan is a good one and there are state tax benefits, you may not want to pass those up.

"Then beyond that, selecting a plan is much like selecting a mutual fund," says Hurley. First, check out the different investment options. If, for instance, you're conservative, make sure the plan you choose has lots of fixed-income options.

Then read up on the minimum investment requirements. Some plans require a few thousand dollars to open the account. Others will take just $50 if you commit to automatic monthly contributions.

Be sure to check out Vanguard's comparison tool, which allows you to compare two plans against each other.