My friend, Ben Gordon (who just called on his way to the hospital for the birth of his 1st child), sent me this analysis:
- The primary benefit of 529 plans is that you can save money that grows tax-deferred, and withdraw it to pay for college-related expenses tax-free.
- In addition, a few states also provide state income tax deductions.
- There is tremendous variation in performance and fee levels.
- If your state doesn't have a state income tax deduction, generally you are best looking for low-cost plans.
- The maximum you can fund as a couple on an annual basis is $24,000. However, there is a process whereby you can put in $120,000. Then you would file a gift tax return that states each of you is gifting $12K per year for a 5-year period, but are doing it upfront. Then, just make sure you don't gift any more money to your beneficiary (e.g. presumably your child).
- The lowest-cost plans are the ones administered by Utah and Nevada. For instance, you can put money into a Utah Vanguard aggressive growth plan (80% US market index; 20% international market index) with an annual cost, inclusive of the fund fees and the 529 fees, of 0.34%. You can buy the Vanguard Windsor fund through Nevada for a cost of 0.65%. This is slightly higher but probably a better investment for a tax-deferred/tax-free vehicle, because it's a value-oriented fund that wouldn't be as tax-efficient as a growth-oriented fund. You are generally best off to put tax-inefficient funds in 529 plans, and hold tax-efficient funds in your regular, taxable accounts.
- For more information, go to http://www.savingforcollege.com/
And here's a story in Smart Money on the same topic.
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