Federally insured accounts in 529 plans also provide a tax-efficient way for parents of high school juniors and seniors to shelter their savings from market volatility. Most 529 plans offer age-based portfolios, which are supposed to shift savings to more conservative investments as the child nears college. But some age-based portfolios are much more aggressive than others. After last year's market meltdown, Feirstein says, some parents of college freshmen were shocked to discover that their age-based portfolio still had 20% of its money invested in stocks.
If you're already using a bank savings account or CD to save for college — whether it's because your child is a senior or because you don't have the stomach for the stock market — switching to an insured option within a 529 plan is a risk-free way to boost your after-tax returns. In a 529 plan, you won't be taxed on the interest you earn, as long as the money is used for higher-education expenses. Interest from bank savings accounts and CDs is typically taxed at your ordinary income rate.
And some 529 plans are offering higher interest rates than comparable bank products, says Joe Hurley, founder of SavingforCollege.com.
If you're already using a bank account or CD to save for college, he says, "Why not get the same or even better product without paying taxes?"
Sandra Block covers personal finance for USA TODAY. Her Your Money column appears Tuesdays. Click here for an index of Your Money columns. E-mail her at: firstname.lastname@example.org. Follow on Twitter: www.twitter.com/sandyblock