Why a 529 plan is a great way to save for college

NEW YORK (FOX 5 NEWS) - Only 0.3 percent of students get a full ride, in the form of a scholarships or grants, to college, according to Michael Conrath, the head of 529 College Savings at J.P. Morgan Asset Management. So it might be a good idea to save some money for your kids' college education.

Michael says starting just 4 years earlier can make a huge difference. If you start saving for your child when they're 10 instead of waiting until they're 14 you'll cut the amount you have to invest for college in half, Michael says.

If you don't know where to begin, ask yourself a simple question: What is my number? Michael says you, as a parent, need to figure out how much you expect to pay for your child, whether at a public or private school.

Then, break away from the herd, and don't put that money in savings. Michael says 60 percent of families who are saving for college have that money in a general savings account. But most financial advisors will tell you that a 529 college savings plan is much more effective because of compound interest.

It also has tax benefits. A 529 plan is a tax advantage investment vehicle for college, Michael explains. Many states, including New York, offer a state tax deduction on your 529 plan contributions. Plus, Michael says, all of your contributions and your earnings growth in the account come out tax-free at the federal, state, and local level.

Family and friends can help send your kids to school, too. Michael says a 529 is a great vehicle for gifting because every dollar you contribute to a 529 is a dollar removed from your estate for estate-planning purposes.

However you choose to save for college, putting money away won't kill your chances of getting financial aid, too. Michael says that when you apply for aid, only about 5 cents of every dollar that you save or invest goes against your financial aid package.

Plus, if your kids' plans change and you put your money in a 529, you've got options. Should they get a scholarship or decide not to go to school, you can change the beneficiary or the student named on the account to either a sibling or anyone else in the family, even a cousin.

You have the flexibility to plan for "what if" situations.

Just be sure to avoid this common and expensive mistake. Do not use your retirement fund to pay for school. Michael says that every $25,000 you take will cost you $80,000 in lost retirement savings down the line, not to mention taxes and penalties if you withdraw from your 401(k).