Since I now have a baby daughter, I'd like to start an educational investment account for her future college (and also possibly graduate/professional school) expenses. I've heard that such investment accounts can reduce a child's eligibility for certain types of government aid, but I figure she'd probably receive minimal government aid anyways due to my high income bracket. Plus, I'm very financially conservative and prefer to assume zero government aid in my calculations since the conditions surrounding such aid could change at any point in the future for political reasons.
My understanding is that there are a few different tax-advantaged ways to save for a child's education: 529 plans, Coverdell ESAs, and U.S. savings bonds. It looks like my income is too high to reap the tax benefits of U.S. savings bonds, so I'm scratching that off my list. One benefit of Coverdell ESAs is that the investments are self-directed (e.g., I could set up a PP), but contributions are capped at a paltry $2k per year. The 529 plan allows much larger contributions, but it looks like the investments are generally very limited (e.g., target date funds only). Of the three options, it looks like 529 plans are the most popular.
There appear to be two main types of 529 plans: Prepaid plans and savings plans. Prepaid plans are based on "credits" that you purchase based on today's tuition rates, and the value of those credits is indexed to the rate of tuition inflation. Sounds a bit complicated and includes number-fudging risk, so I'm leaning away from it. Savings plans, by contrast, grow based on market performance just like IRAs and 401(k)s -- simple to understand.
Assuming I go with a 529 savings plan, these are the main questions I currently have:
- How should I compare 529 plans and select one? (Looks like each state has its own plan, each with its own unique tax benefits, and I can invest in any of them even if I don't live in that state.)
- Are any 529 savings plans self-directed (meaning I could set up a PP), or do they all have very limited investment options?
- Are there any situations in which it makes more sense to use a regular taxable investment account instead of trying to reap the tax benefits of a 529 savings plan?
- Any "gotchas" or subtle points to consider when choosing a 529 savings plan?