Many of us can’t imagine how we’re going to send our kids to college. For the past 20 years, college expenses have been rising at an incredible 10% annual rate. Currently, many private schools can set back its students $50,000 a year, a $200,000 college pricetag. At conservative estimates, newborns can expect to pay $400,000 for their college degree.

Obviously, it is never too early to start. 529 Plans provide an effective way to save now for your child’s college education. All 529 investment earnings are free from federal taxes when the account assets are used for a beneficiary’s education. The account provisions offer many advantages over a traditional custodial account or Unified Gift to Minors Account (UGMA). The assets are still controlled by you, and may be withdrawn at any time for any reason. If the funds are withdrawn for a reason other than the beneficiary’s education, they become subject to Federal and State taxes as well as a 10% penalty on the amount withdrawn. Also, funds in a 529 plan are not subject to estate taxes.

Gifts to a 529 can be accelerated, and up to $55,000 dollars can be deposited from each donor in the first year. This is a five year accelerated gift, and is a useful tool in estate planning for grandparents that want to transfer dollars to their grandkids effectively. The account beneficiary can be changed to another qualified member of the family at any time without adverse tax consequences. Practically speaking this makes one account available for any child you have.

Many states have endorsed plans which offer a state income tax deduction. In New York, there are two plans offere,Vanguard’s New York 529, and the broker-sold New York 529 Advisor Plan:

The New York 529 Advisor Plan offers a number of investment management options. You can choose managed portfolios where investments are managed more conservatively as your child gets closer to college age. You can choose a specific portfolio from a Columbia asset allocation model, or you can chose a custom portfolio focusing on a single asset class.

There are no income limits and the maximum you can save for one beneficiary is $250,000 dollars.

Important to remember is that withdrawals not for a beneficiary’s college education are subject to federal and state taxes, as well as a 10% federal penalty. For planning purposes, the beneficiary does not have to be your child, you can save for a grandchild, niece, nephew, friend, parent, step-parent, step-child, grandparent, in-laws, or first cousins. This feature allows for great financial planning creativity.