Although opinions vary about whether you should provide some or all of your child's college tuition, if you do plan on saving for college, you will want to maximize your earnings.
I have spoken in the past about how I'm using UPromise to boost our college savings (about $1,600 earned since 2001), but we are also trying to save on our own to supplement our UPromise earnings.
To increase our earnings, we invest our money in our state's 529 plan. The money that we contribute to the 529 fund is deductible on our state income taxes. Plus, the money grows tax-free (we don't pay taxes on any earnings). We even received a match from our state when we contributed a certain amount the first year.
Of course, as the state 529 plans are somewhat of a monopoly (usually each state chooses it's own plan), some plans are better than others. Morningstar releases a report each year listing some of the best and worst funds in terms of the fees that are charged. You will want to decide whether the state tax deduction is worth the fees (if your state offers one of the funds with high fees). Check out your own state's 529 plan for more information.
Most 529 plans have various options for investing your money. You can choose an age-based plan (our plan offers aggressive, moderate, and conservative options for each age-based plan). If you are skittish of the market, you can often choose a fixed-income plan too.
When your child goes to college, you can withdraw both your contributions and earnings tax free (for an accredited institution) for both tuition and fees as well as books. If your child doesn't attend college, you can transfer the beneficiary to another family member, and if they receive scholarships, you can also withdraw the money penalty free up to the scholarship amount. If the funds are not used for qualified expenses, you will pay a 10% penalty on your withdrawal.
On Friday, I plan to write about saving for college using a Roth IRA as an alternative to a state 529 plan.
Do you save for your child's college? If so, do you use a 529 plan? For more frugal ideas, visit Being Frugal.
Cincinnati Cents
I have awarded you the Lemonade Stand Award for having a positive and helpful blog. You can check out the details here:
http://cincinnaticents.blogspot.com/2009/03/lemonade-stand-award.html