Currently, withdrawals face federal income tax rates that range from 15 percent to 39.6 percent, while the state grabs 1 percent to 9.3 percent. By investing outside such accounts, however, you can qualify for the capital-gains break that cuts the federal tax to 10 percent to 20 percent. There are no income limits, and savings can be substantial. Unlike the ballyhooed Education IRA and the Hope and Lifetime tax credits, there is no income limit to restrict who can open a ScholarShare account. The total will vary depending upon the student's age and annual college costs, with the total rising as a child nears college because there's less time for the investment to grow.
Contributions are flexible.
If you're flush with cash, though, you can cut a single check for the maximum amount allowed for your student's age. Parents aren't the only ones who can contribute either. Grandparents or other benefactors can either contribute to an account set up by the parents, or open their own. The total of all the accounts cannot exceed the cap set for the prospective student, however. You cannot contribute to ScholarShare and the Education IRA in the same year.