Guide to College Saving Plans

By MSN Money
No one savings method fits every family. Consider your tax bracket, your child's age, how much control you want over your investments and how much financial aid you expect to get.

By 2020, you'll need an estimated (and heart-stopping) $225,000 to put Junior through a private college or $105,000 for a public university.
Conventional wisdom says the sooner you start saving, the more funds you'll accumulate.
First, figure out how much you'll need to save, using your child's age as a yardstick. (See MSN Money's tuition calculator first.)
Then start comparing plans. (See "College plans for the rich, poor and in-between.") Here are the most common methods:

• 529s, which are state-sponsored investment accounts, let you put aside money for college. The money grows tax-deferred and is tax-free when withdrawn to pay qualified education expenses, and may be deductible on your state tax returns. In addition, for families with multiple children, funds can be moved from one 529 to another, depending on which child can best use the money. When choosing a 529, however, look hard at the fund's commissions, fees and performance. You can do some research at Morningstar or Savingforcollege.com. The plans haven't fared well in the down stock market, and there may be better choices.

• Coverdell Education Savings Accounts allow earnings to grow tax-deferred and distributions to be tax-free when used to pay qualified educational expenses. You can currently contribute up to $2,000 a year and withdraw money tax-free. However, unless Congress extends the benefits after 2010, the maximum annual contribution to a Coverdell will fall to $500. (See "How Uncle Sam wants you to save for college.")

• Prepaid tuition plans allow parents to lock in future tuition at current rates. These tax-deferred plans are designed to remove investment risk. However, some plans allow saving only for tuition, not room and board, which means you'll need an additional source of funds. (See "Pay tomorrow's tuition at today's prices.")

• U.S. Savings Bonds purchased after 1989 may be redeemed tax-free when the bond owner, spouse or dependent uses the proceeds to pay college tuition and fees. However, the bonds' safety is balanced by low returns, and the tax exclusion is phased out for higher-income tax brackets.
• Custodial accounts, which include those under the Uniform Transfers to Minors Act and Uniform Gifts to Minors Act, are not as popular as they once were. Accounts are opened in a child's name, and the income is taxed at the child's rate rather than the parents' presumably higher one. However, 2006 legislation changed "kiddie tax" rules so that children have to wait until they turn 18 to take full advantage of the lower tax rate. In addition, colleges consider custodial accounts to be student assets, which count against them in financial-aid packages.
• Individual retirement accounts are a method of last resort. Early-withdrawal penalties are waived when Roth or traditional IRAs are used to pay qualified post-secondary education costs for you or your family. However, cashing out could leave you in a bind at retirement time.
• If you serve (or have served) in the military, there may be additional scholarships for you and your children.