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Question for the Money Doctors

Question submitted on Apr 11, 2012.



We are expecting a child later this year and we reside in the San Francisco Bay Area in California. What is the best way to save for college for our child? Is it the 529 plan and if so which one? Also, should the beneficary be in my child''s name or parents name (not sure if this impact financial aid)?

Thank you


A 529 is an excellent way to save for college.  The Coverdell Education Savings Account is an option also, however, the contribution limits are much lower ($2,000 per year for the ESA vs $13,000 per year for the 529).  In California, TIAA-CREF assumed the management from Fidelity in November 2011 of the Scholar Share College Savings Plan (Scholar Share).  Fidelity still manages the advisor plan in California but this plan is closed to new accounts effective December 31, 2011.

When you contribute to a 529, any account earnings are federal and California income tax-deferred. Plus, distributions used to pay for qualified higher education expenses will be free from federal and California income tax. However, the student does not need to attend a California college or university.  The funds may be used for any eligible educational institution which includes:  public and private colleges and universities, graduate and post-graduate schools, community colleges, and certain proprietary and vocational schools.

Keep in mind that non-qualified withdrawals may be subject to federal and state taxes and the additional federal 10% tax in the event your child does not attend an eligible educational institution.  However, if you expand your family you can always change the beneficiary on the account.  The beneficiary on the account will be your child and you would be the owner on the account.

While financial aid may be impacted by a 529 depending on the type of institution your child attends, 529 plans in general are typically a better option to save without jeopardizing potential financial aid.  Congress has bestowed these investments with special advantages for aid-eligibility purposes.

You may want to consider getting specific advice for your personal situation from a local CPA/PFS in your area.  Visit to connect with one in your area.

Best wishes with the upcoming addition to your family.

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