Your 529-Plan Questions Answered

You say that having a 529 college-savings account won't hurt your chances for financial aid because it's considered a parent-owned asset and is assessed less heavily in the federal financial-aid formula than student-owned assets. But what about private sources of financial aid from the college itself? Can the school hold a 529 plan against you?

It's possible a school might adjust its financial-aid award if you have a 529 plan. But 529s are always considered parental assets, so they get more favorable treatment than student-owned assets. And a big portion of financial aid comes in the form of loans, so you're better off saving rather than borrowing.

Would you consider a Roth IRA a good investment vehicle as an alternative to a 529 program? We will qualify for tax-free withdrawals from our Roth by the time our child starts college.

In your case, a Roth IRA could be a good alternative to a 529 plan. It offers the same tax-free benefits you'd get with a 529, plus more flexibility. Just make sure you won't need the money for your own retirement income.

Roth IRAs are also an option for younger parents, but not quite so attractive. You can withdraw your Roth contributions at any time without paying tax or a penalty. You can also withdraw earnings for college expenses without paying a penalty, but you will owe income tax.

And, of course, money you withdraw won't be available to grow for retirement -- which is, after all, the primary purpose of a Roth IRA.

I would like to open a 529 plan for my 13-year-old grandson. Whose name should the account be in-mine or my son's? I live in New York and my son lives in Pennsylvania.

Both states offer residents an income-tax break on 529 contributions, so it depends on your situation.

State residents like yourself who contribute to New York's 529 plan can deduct up to $5,000 (up to $10,000 for joint filers) from their state income tax each year.

Opening the account in your name also offers benefits if you'd like to make a gift to your grandson and move money out of your estate. Plus, the federal financial-aid application doesn't inquire about grandparent-owned accounts.

In Pennsylvania, on the other hand, residents who contribute to a 529 plan in any state can deduct up to $12,000 per beneficiary (up to $24,000 for joint filers) from their Pennsylvania income tax. So your son could pick any plan regardless of which state sponsors it. ( Find the best state 529 plan for you.)

What happens to money in a 529 plan if a child does not go to college?

You can transfer the funds to another family member and preserve the tax benefits, or you can withdraw the money yourself and pay income tax and a 10% penalty on the earnings.