LIVE: Its National College Savings Month- this your chance to ask the expert about 529 savings plans
Historically, stock and bond investments have produced greater long-term returns than bank accounts. But taking the investment approach to saving for college can expose investors to losses.
"With college savings plans you don’t have a guarantee of keeping up with inflation," said Leo Acheson, an analyst at Morningstar, which puts out an annual ranking of 529 plans. For the set-it-and-forget-it investors, all 529 plans offer investment portfolios that take into account the number of years before the child goes to college. When the child is young, the portfolios invest heavily in stocks and over time transition into less risky holdings.
Investors who withdraw funds from their 529 accounts for anything other than college costs will have to pay federal income tax on the earnings portion of the plan funds as well as a 10 percent penalty, in addition to possible state fees.Anyone can contribute to a 529 plan for a single beneficiary. So parents can set up an account and invite relatives to pitch in.
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