Are state savings plans a good way to save for college? Answer: Yes, they can be an excellent way to save for college. State savings plans, a type of 529 plan, emerged on the scene in 1996. State savings plans are established by the states and typically managed by an experienced financial institution designated by the state. Each plan has slightly different features. A state savings plan lets you save money for college in an individual investment account that offers federal tax advantages. You (or anyone else) open an account in your child's name and thereafter contribute as much money as you wish, subject to the plan's limit. The state's selected money manager takes your contribution and invests it in one or more of the plan's pre-established investment portfolios, which typically consist of mutual funds. Some plans automatically place your contribution in a portfolio that's tailored to the age of your child. (The younger your child, the more aggressive the percentage of stocks. As your child grows older, the portfolio gradually shifts to more conservative investments.) However, the trend is for plans to let you choose the portfolio you want at the time you join the plan, without regard to your child's age. This lets you take into account your risk tolerance and other factors that may be important to you. State savings plans have become popular because they combine many desirable tax features with the ability to use the money at any accredited college in the country or abroad. Your contributions grow tax deferred, and if withdrawals are used to pay the beneficiary's qualified education expenses, the earnings are completely free from income tax at the federal level. Many states also add their own tax benefits, such as tax deductions for contributions and exemption of the earnings from state income tax. However, if a withdrawal isn't used to pay the beneficiary's qualified education expenses (known as a nonqualified withdrawal), the earnings portion is subject to a 10 percent federal penalty and is taxed at the rate of the person who receives the withdrawal (a state penalty may also apply). There are no income limits that determine whether you are eligible to open a state savings plan account--everyone is eligible. And if your child decides not to go to college or gets a full scholarship, the money in the plan can be transferred to a qualified family member without penalty. But investment returns aren't guaranteed. If your investment portfolio performs poorly, you're still bound by the investment decisions of the plan's money manager, unless the plan allows you to change the investment strategy for your existing contributions (which it is federally authorized, but not required, to allow once per calendar year). State savings plans are also free to let you change your investment option for future contributions. If your plan doesn't provide this flexibility, then you are allowed by federal law to roll over your state savings plan account to a different 529 plan (state savings plan or prepaid tuition plan) without penalty once every 12 months. One final note: You are not limited to your own state's savings plan. Most states allow anyone to participate in their plan. You may also participate in the state savings plan of more than one state.