Manage Your Own 529 Plan

by Jane Bennett Clark, from Kiplinger's June issue

Want to steer your college fund through the high seas yourself? With a Coverdell Education Savings Account, you can manage your own investments. You set up the account at a sponsoring institution, such as a bank or mutual fund. As with 529 plans, the money grows tax-free, but with the Coverdell, you can withdraw money tax-free for elementary and secondary-school expenses as well as college costs.

To get in on this deal, your adjusted gross income must be $110,000 or less ($220,000 or less for married couples filing jointly). You can contribute up to $2,000 a year.

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You won't get a state tax deduction for the contribution, but you can roll the amount over to a 529 plan later without tax or penalty and grab the deduction then, getting the best of both worlds.

The switchover works only in one direction. If you move the 529 account into a Coverdell, you pay tax and a penalty. Be aware that the Coverdell will revert to less-generous terms in January 2011 unless Congress extends the current provisions.

For more college savings help, see our latest coverage: Salvage Your College Savings