The most common education-savings plan is the Section 529 plan. All 50 states, plus Puerto Rico, offer a version of the Section 529 plan. Contributions are not deductible on your federal tax return, but may be on your state return. Each state has different investment alternatives, and some of them include stocks within the funds they offer. Alternatively, you can use an Individual Retirement Arrangement, or IRA, to save for college, as the IRS waives the 10 percent early-withdrawal penalty for college-related expenses.
1. Visit your state's Section 529 website. You can find it on www.savingforcollege.com, a consumer website that focuses on college savings and Section 529-related information.
2. Find a fund that has "equity," "variable," "growth," "balanced," or similar language in the name or the fund objective. These funds will contain at least a modest exposure to equities. If you want to add stocks, or equities, avoid funds that have the words "conservative," "guaranteed" or "pre-paid," as these options will have few or no equities in their portfolios.
3. Purchase or transfer assets into these funds. You can do so via your state's 529 website. Some 529 plans feature advisor-sold funds, in which case you will go through a financial advisor who will help you with your fund selection. You will typically pay that financial advisor a sales commission in exchange for the assistance.
4. Establish an IRA. You can use a traditional IRA or Roth IRA for this purpose. The taxation of the Roth IRA is similar to the taxation of the Section 529 plan for qualified higher education-related expenses: No tax deduction for contributing, but tax free growth and tax-free withdrawals (provided the money has been in the IRA at least five years.) If you use a traditional IRA, you will get a tax deduction in the current year, but withdrawals are taxable, even if they go to pay college expenses. IRAs have specific eligibility requirements. See IRS Publication 590, Individual Retirement Arrangements, to make sure you qualify before you invest.
5. Purchase stock funds or stocks within the IRA. You can do so via an online broker, mutual-fund company or in person through a full-service broker.
- Jupiterimages/Comstock/Getty Images