• Great flexibility of investment choice.
• Expenses may be lower than in some state 529 plans.
• Money can be used for primary and secondary education expenses starting in 2002.
• Tax-free withdrawals for qualified education expenses (tuition, fees, tutoring, books, supplies, related equipment, room and board, uniforms, transportation, extended day programs, computers, Internet access).
• Can make contributions up until April 15 of the following year.
• Anyone can contribute if they meet the earnings requirements (not just family members; corporations may contribute starting in 2002).
• Can contribute to both an education IRA and a 529 plan starting in 2002, but watch out for gift tax consequences if you contribute more than $10,000 per person in the same tax year.
• Can still claim HOPE and lifetime learning credits as long as the payout from the education IRA isn't used for the same expenses for which credit is taken.
• If you don't meet the earnings requirements, you can gift $2,000 to the beneficiary and let them set up their own account.

Cons:

• Total contributions may not exceed $2,000 a year per beneficiary.
• No matter how many people contribute, total contributions per child can't exceed $2,000.
• Earnings restrictions: If you earn $95,000-$110,000 (single) or $190,000-$220,000 (married filing joint), contributions will be limited; if you earn more than $110,000 (single) or $220,000 (married filing joint), contributions are not allowed.
• Beneficiaries must be under age 18 when contributions are made (except special-needs beneficiaries).
• Money must be used by age 30 or earnings are taxed as ordinary income plus a 10% penalty (except special-needs beneficiaries). To avoid this taxation, accounts can be rolled over into another family member's Education IRA.
• Beneficiary owns the account. If they don't go to college or use the money for primary or secondary school, the donor can't get his/her money back.
• Since the beneficiary owns an Education IRA, less financial aid may be available.
• No state tax deduction for contributions.
• No guarantee of positive investment returns. Account can lose money.

Section 529 Savings Plans

Pros:

• Money can be used for any college in the U.S.
• Can be state tax breaks for contributions.
• Tax-free distributions for qualified expenses (tuition, fees, books, supplies, required equipment, room and board) starting in 2002.
• Can still claim HOPE and Lifetime Learning Credits as long as the payout from the 529 plan isn't used for the same expenses for which credit is taken.
• Can roll over to another plan once every 12 months for same beneficiary.
• Can roll over more often than once every 12 months if changing beneficiaries to another family member. Family members include child, grandchild, sibling, stepsiblings, parents, grandparents, stepparents, nieces, nephews, cousins, aunts, uncles, in-laws, and spouses.
• Can gift up to $50,000 a year per child without triggering gift tax (gift assumed to be $10,000 ratably over five years). Effectively removes this money from your taxable estate (if you die within five years, a portion may be included in your taxable estate). If you gift split with your spouse, you can get $100,000 out of your estate without triggering gift tax.
• Can contribute to both an Education IRA and a 529 plan starting in 2002, but watch out for gift tax consequences if you contribute more than $10,000 per person in the same tax year.
• Can contribute more than $50,000 a year and use increased unified credit ($1,000,000 starting in 2002) to offset the gift tax. Check with each state plan to verify the maximum contribution.
• Donor retains control of account. If beneficiary doesn't go to college, donor can get his/her money back although they would owe tax on the earnings and a 10% penalty.
• No earnings restrictions.
• Since donor owns these accounts, beneficiary may be eligible for more financial aid than if the child owned the account.
• No limited enrollment period.
• No date by which the funds must be used.
• Some states will allow you to contribute by using your credit card. You may be eligible for rewards from your credit card company (check to make sure there are no monthly caps on rewards. For instance, on some credit cards there is a $10,000 per month reward cap. So in that case, you might want to contribute $10,000 per month for five months to get the maximum rewards.)

Cons:

• Must use state chosen investment options.
• You could lose money in more aggressive investment options.
• Expenses of the plan may be higher than what you'd pay if you invested the money yourself.
• A nonqualified withdrawal (used for purposes other than specified education expenses) will be taxed on earnings and will incur a 10% penalty. Exceptions to the penalty include death or disability of the beneficiary or if the beneficiary receives a scholarship.
• States may limit contribution amounts.
• Since donor owns the account, it may be tapped by Medicaid if the donor should need nursing home care and not have other funds available. Long-term care insurance will add to the cost, if you chose to purchase the protection.
• Not all states have protections against donor's creditors.

The two biggest consideration with either plan is the expense and who owns the money. Ownership is important with regard to financial aid. Which brings me to my argument against this plan of saving.

I agree, some of these plans cost little to begin, and a payroll deduction is probably available. But the money you save must be above and beyond your ability to make your daily ends meet, your ability to save for your own retirement, and your ability to give your child an enriching initial eighteen years prior to college.

The first three of my children graduated from high school but never intended to go on to college. My wife and I provided incredible opportunities for them while they were in high school, but they never saw the argument for higher education as compelling. Sure, they regret it now, but I do not regret keeping that money invested for our future. The last kid at home will, in all likelihood attend college, but will do so through a series of grants and scholarships, and with financial help.

According to FinancialAidOfficer.com, Guidance from the U.S. Department of Education says that your 529 savings account is treated as an asset of the parent or other account owner in determining eligibility for federal financial aid. This means that your expected contribution towards your child's college costs will include 5.6%, or less, of the value of your account for each academic year. Another consideration, especially for those of us who will apply for financial help for tuition, in a 529 plan, the assets within are deducted for your financial "need" on a dollar for dollar basis. If your prepaid tuition contract pays out $5,000 in tuition benefits this year, you will be considered as having $5,000 less need for financial aid.

The ability for your child to get to college will not be deterred by your inability to save for it. They will graduate (with luck) from those institutions of higher learning with one of two things. Besides the degree, it will either be a modest debt or an enormous debt. A college grad will, according to the statistics, earn about a million dollars more over the course of their working life than someone who has not attended. And there is increasing evidence that the skills to do even mediocre jobs will require some amount of advanced learning.

Sure, you may not be able to send them to an Ivy league school or another private institution, but college, no matter what the costs, is what you bring to it. School your children now. Broaden their horizons. Spend time with them and teach them the world. They will be better adults and will, from an economic standpoint, be able to raise more money for their education through grants and scholarships.