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Updated: 9:19 a.m. Friday, Jan. 3, 2014 | Posted: 1:48 p.m. Thursday, Jan. 2, 2014

Save for college tax-free with a 529 plan

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By Clark Howard

If you're saving for your child's college, there's a tool that can help you get it done in a tax-free way.

A 529 plan is the best way to save for your kid's college. 529 plans -- aka college-savings plans -- allow you, a relative, or a friend to put money aside as an investment for a child's college education. The money grows tax free and is spent tax free for eligible college expenses such as tuition, books, and fees.

If the child doesn't go to college, you can transfer the plan to another child for free without being taxed. If there are no other children you want to have the money, you can use it yourself. But beware that you'll pay a 10 percent penalty plus tax on any earnings if you take this latter option.

Another unique feature of 529 plans is their flexibility. You can put in as little as $15/month. Or a rich grandparent can pop in as much as $70,000 all at once.

529 plans are unnecessarily complicated because they're all required to have state sponsorship. Yet you're not limited by where you live as far as making contributions. You may, however, enjoy a state tax deduction if you select your own state's plan.

Which plan should you pick? Let my guide help you in deciding.

All of my picks for 529 plans
around the country are sold commission-free. You can buy them directly through the state that sponsors them. I only include plans that charge less than 1% per year to manage your 529 account. The best plans are below 0.4% per year. That means almost none of your money is being diverted to the 529 manager allowing greater savings for your kids' college.

If your state isn't listed in the "Honor Roll" section of my guide, pick a state from my "Dean's List." There you'll see plans from Utah, Iowa, and New York. These are the lowest-cost plans available across the board. Utah is by far the single best plan in the country.

One caveat though: Do not save a penny for your child's college education until you fully fund your own retirement. There are no scholarship plans for your golden years!

For further reading:


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