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Americans fling more than $30 million a day at 529 college savings plans, and no wonder—the plans provide some sweet tax savings, a variety of investment choices and the satisfaction that you're doing something for the kids.
These plans, sponsored by almost every state and the District of Columbia, allow savers to accumulate money their children use for college. Contributions don't get any federal tax breaks, though some states offer tax incentives to participants. When the money is withdrawn to pay for qualified college expenses, it is not taxed - so all the money earned within the 529 over the years is tax-free income.
But wait, there's more. The 529 is a creation of federal tax law and so joins others—like the home mortgage deduction and the write off for health savings accounts—that crafty taxpayers can take beyond their stated purpose and capitalize on if they know how to play the game.
The home mortgage deduction, for example, spawned home equity lines of credit, which have bankrolled everything from home improvements to vacations. And those health savings accounts—designed to help savers accumulate enough to cover their high deductibles and co-pays—now serve as back-door retirement plans for some savvy savers.
And so it is with 529 plans. Open one for junior when he's little, feed it regularly, and you'll be happy to have a pot of tax-free savings when it is time to matriculate. (One word to the wise: Keep the account in your name, and name your child the beneficiary, to avoid the funds hurting his financial aid eligibility.)
But that is just the way it's supposed to be used. Here are some other ways to benefit from a 529 plan:
The advantage to that? Short-term flexibility—to use the money for yourself, her grad school or some future grandchild and really long compound interest. Put $100 monthly into an account earning 7.5 percent, and you'll accumulate $45,720 in 18 years. Let it run for 25 years, and you'll have $88,331. If your daughter doesn't have kids or go back to school, you can transfer the plan to another relative. (The only thing you don't want to do is withdraw the money for anon-qualified educational purpose—then you'll have to pay a 10 percent penalty and income taxes on the earnings you take out.)
(Read more: More students paying for college)
(Read more: Six college courses that help grads land jobs)