6. 529 Accounts
These allow parents to save, tax-free, for a child's education. Rules are established by each state but it's possible to set up an account in a different state. Some are very sophisticated, others more basic.
Who's It For?
They're great for anyone with kids, says Mark Oleson, director of the Office of Financial Success at the University of Missouri at Columbia. Think of it as the IRA for your child's college tuition.
"It's nice for someone who has a little, and it's nice for someone who has a lot," Oleson says.
And it doesn't count against your child's assets when he or she applies for financial aid, thanks to provisions in a new law passed in February 2006.
Who's It For?
They're great for anyone with kids, says Mark Oleson, director of the Office of Financial Success at the University of Missouri at Columbia. Think of it as the IRA for your child's college tuition.
"It's nice for someone who has a little, and it's nice for someone who has a lot," Oleson says.
And it doesn't count against your child's assets when he or she applies for financial aid, thanks to provisions in a new law passed in February 2006.
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Technically, as with a lot of investments, the principal is not protected. But with many state plan options, you can elect to make your investments as conservative or aggressive as you want.
If one child elects not to go to college, you can use it for another. And if none of them go, you can take the money, but the income is subject to a 10 percent penalty and taxes, says Barry Picker, partner in Picker, Weinberg & Auerbach CPAs.
While that seems like a lot, it may be more money than you'd set aside if you didn't have the plan, says Oleson.
Pros
Tax break: 529 plans allow tax-free savings for college. It's an easy way to put something away for college.
Options: Frequent choices in investment strategy/risk tolerance. Depending on the state in which you've set up the plan, you will likely have a choice of savings options with a variety of investments and rates of return and risk.
The assets: Funds in a 529 may be in the parents' or student's name. If owned by a student, a 529 account is excluded from the FAFSA, so it doesn't count against the student in aid calculations, thanks to provisions in a new law passed in February 2006.
Higher potential return: Because this is an investment, you have strategies and options that will offer a larger potential payoff.
If one child elects not to go to college, you can use it for another. And if none of them go, you can take the money, but the income is subject to a 10 percent penalty and taxes, says Barry Picker, partner in Picker, Weinberg & Auerbach CPAs.
While that seems like a lot, it may be more money than you'd set aside if you didn't have the plan, says Oleson.
Pros
| Type | Current | APR |
|---|---|---|
| 3 Month CD | 0.87% | 0.87% |
| 6 Month CD | 1.19% | 1.19% |
| 1 Yr CD | 1.59% | 1.60% |
| 5 Yr CD | 2.62% | 2.66% |
| 1 Yr Jumbo CD | 1.64% | 1.65% |
| MMA | 1.08% | 1.09% |
| $10K MMA | 1.15% | 1.16% |
| $25K IRA MMA | 1.40% | 1.40% |
| Jumbo IRA MMA | 1.50% | 1.51% |
| Interest Checking | 0.59% | 0.59% |
Savings Accounts Data Provided by Bankrate.com
Compare Rates in Your AreaCons
Not as liquid: While you can cash out before your term is up, you could be risking some or all of your interest, says Douglas Borkowski, director of the Financial Counseling Clinic at Iowa State University.
Need to shop rates: The rule of thumb is the longer the term, the higher the interest. The problem is that not all CDs follow that rule. "In some cases, short-term is paying about the same as long-term," says Keith Leggett, senior economist for the American Bankers Association. His advice: Don't lock up your money for longer periods of time if you can get the same rate in a shorter term.
Low rates: You could find better returns elsewhere. Depending on your luck, a money market mutual fund could give you a better return. And some savings accounts (particularly those offered through online divisions of some national banks) are offering return rates that rival CDs.
Higher minimums: CDs often require higher minimum deposits. To purchase a CD, you often need at least $500 to $1,000.
Next: Savings Bonds
1 | 2 | 3 | 4 |5 | 6 | 7 | 8 | Banking Home
Next: Savings Bonds
1 | 2 | 3 | 4 |5 | 6 | 7 | 8 | Banking Home
| Compare Savings Products | |||||||
|---|---|---|---|---|---|---|---|
| Cost to open | Min bal. | APY* | Insured | At risk | Investment choice |
Liquidity | |
| Passbook
savings |
minimal | usually none | .25 - 5.5 | yes | no | no | complete |
| Money market acct |
$1,000 - $50,000 | yes | .15 - 5.6 | no | no | no | liberal |
| Christmas /Club acct |
minimal | usually 0 | .5 - 5.5 | yes | no | no | complete |
| MM mutual funds |
$500 - $5,000 | often | 4.5 - 5.5 | yes | no | yes | partial |
| CDs | $500 - $5,000 | usually | .10 - 5.5 | yes | no | no | with penalty |
| 529
accounts |
minimal | usually 0 | n/a ** | no | yes | yes | highly restricted |
| Savings
bonds |
approx $25 | yes | EE
bonds - 3.7 I-bonds - 2.41*** |
yes | no | no | restricted |
| Treasuries | minimum $1,000 | yes | 4.66 - 5.08 | yes | no | no | restricted |
