Saving for Your (Children's) Future

There's nothing harder than saving money when you don't really want to. It's only made harder by the fact that the government likes to tax our savings. Fortunately, we have IRAs, 401(k)s, and 403(b)s to help us avoid taxes when saving for retirement. But another big expense most people face is college tuition (not to mention books, room & board, and beer money) for their children. There's the Education IRA, which allowed you to save $500 a year towards a child's education (now up to $2000 a year, thanks to new tax laws). But $500 a year isn't much, especially considering that many people are only saving for 10 years or less before their child is enrolled and the bills start arriving.

There's another option, which I just happened into today -- the 529 plan. 529 plans are like a 401(k) for college expenses. They grow tax-deferred until withdrawn, and are then taxed at the rate of the student (typically the lowest bracket). Because these are state plans, you can get excellent tax advantages at the state and local level, as well as the advantages on federal taxes. Other advantages include having a much larger contribution ceiling (over $100,000 in some states) and asset allocation plans that allow you to mitigate some investment risks. You can even create 529 accounts for children you're not directly related to -- or yourself, if you plan on returning to school someday. Another benefit is that you can have rebates on purchases deposited directly into a 529 account through Upromise.

As with any investment decision, you should review all the available information carefully before opening a 529 account. I found a CNN/Money article, a Motley Fool article, and the SavingForCollege website during my brief research.