Choosing the right college savings account can feel overwhelming. All with unique sets of complex rules, it's tough to even know where to start with at least half a dozen different types of college savings accounts. The right type of college savings account can be selected by asking yourself a few simple questions, ultimately. Your answers will pretty much make the decision for you since each account has its unique features and benefits.  You won't need to look much further than a Section 529 Prepaid Tuition Plan. These plans let you buy tuition in today's dollars, and are guaranteed by the issuing state to give you an equivalent amount of tuition at some point in the future. The state that runs such a plan would have to go bankrupt for you to lose your investment from a safety perspective. That's as safe as you'll find without buying US Government Bonds. It's unlikely to outperform a portfolio that has stock market exposure from an investment return perspective, but will likely outperform other "safe" college funding options. Since the historical rate of college inflation is close to 6%, a better investment would need to show the same level of safety but a higher rate of return.

Choosing the right college savings account

 

            Series EE historically has earned 3-6%, which leaves them lagging behind the Section 529 Prepaid Tuition Plan. Buying individual bonds in a UGMA account might get you close to the return of prepaid tuition plan, but will be subject to taxation on any interest earned above a certain amount. Using bond mutual funds in any of the other savings plans may offer an equal historical rate of return, but will also be subject to volatility and potential losses. You might want to consider the Independent Section 529 Plan if you think your child will attend a private school since most states' plans primarily cover public universities and colleges. It would seem foolish to not take advantage of it. Most often, this incentive comes in the form of a deduction or credit on your state income tax return, considering that many of the states essentially put cash back into your pocket for using their Section 529 Saving Plan. It's probably wise to take the "free money since many of the states offer at least one or two good long-term stock market options in their savings plans. This initial boost will lift your returns over time even in case you do not have access to your favorite mutual fund. It's unlikely that you will accumulate more than you'll actually need for college in case you think you'll save less than $2,000 per year (the maximum allowed contribution to a Coverdell ESA). You probably won't have to face the possibility associated with a Coverdell of having to give a child the leftovers at age thirty since you'll likely spend the majority of the funds you save. This account will probably better fit your needs since Coverdeil ESA offers offers much more freedom in selecting your investments, as well as much looser standards on how the money gets spent (including tuition for grades K-12).