| There are two basic types of tax-free
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| | rate you agreed to when you signed up
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| college savings plans, the Coverdell
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| | regardless of what college they attend.
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| educational savings account and the 529
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| | Coverdell education savings accounts work
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| savings account. Each has advantages and
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| | in a similar way to Roth IRA accounts.
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| disadvantages depending on the situation
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| | Parents can deposit after-tax income into
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| of the individual family.
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| | an account to save for college or private
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| 529 college savings plans allow parents,
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| | school (one of the unique benefits of a
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| and in some cases grandparents and other
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| | Coverdell account). Any interest on the
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| family members, to contribute
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| | account is tax-free if withdrawn for
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| tax-deferred money to a savings account
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| | eligible educational expenses. However,
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| earmarked for college. The money gains
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| | unlike 529 plans, Coverdell accounts are
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| tax-free interest and there is no tax
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| | capped at $2,000 per child. Even if the
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| assessed on the principle if it is
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| | child has accounts established by
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| withdrawn to cover eligible college
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| | grandparents or other family members, the
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| expenses. The current tax rules will be
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| | total invested in the child's name cannot
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| in effect until 2010, but even if
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| | exceed $2,000. For this reason, many
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| Congress does not reauthorize that
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| | families choose both a 529 plan and a
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| section of the tax code, tax will still
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| | Coverdell plan.
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| only be applied to the earnings on the
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| | Also, since Coverdell accounts are held
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| account, not the principle.
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| | in the child's name, any funds not used
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| Every state now offers a 529 plan and
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| | for college will eventually be
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| some offer more than one type. For
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| | distributed to your child, not back to
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| example, some states like Florida offer
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| | you. This is the opposite of 529 college
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| prepaid plans that lock in today's
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| | savings accounts which are held in the
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| tuition rates and also offer traditional
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| | parent's name and can be transferred to
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| savings plans. It is a misconception that
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| | other family members.
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| signing up for a state-run college
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| | Finally, the rules covering 529 plans are
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| savings program requires your child to
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| | easier to understand than those covering
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| attend college in that state. All states
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| | Coverdell accounts. Families considering
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| have reciprocal agreements allowing
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| | opening a Coverdell account should
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| participants to choose from a huge number
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| | consider consulting with a tax
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| of colleges all over the country. If you
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| | professional to be sure they understand
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| have chosen a prepaid plan, however, your
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| | all the rules and tax implications.
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| child will only receive tuition at the
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