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Paul Moeller wisely looks out of state to save for his kids' college educations. He and his wife, Hope, live in Burlington, Conn., but invest in the College Savings Iowa 529 plan for their two boys: Max, 4, and Sam, 2. Connecticut is among 24 states, including California, Florida and Texas, that don't offer tax breaks for 529-plan contributions. If you live in one of these states, Iowa's plan is a smart choice.
We like the plan because it has low costs and a variety of investment options, unlike many 529 programs. Compared with Connecticut's three investment choices, Iowa offers eight. You can pick portfolios that become more conservative as your child approaches college age or that comprise a mix of investments that don't change. And performance is good. The Iowa plan uses different combinations of Vanguard index funds. Its most aggressive option returned an annualized 21% over the past three years to May 1.
Investments in 529 plans grow tax-deferred, and withdrawals are currently tax-free if used for qualified educational expenses. Each state has its own limits and rules on contributions. Iowa's plan allows a $239,000 maximum contribution -- which should put your child through the most expensive Ivy League school.
You can make a contribution of as little as $25, so the plan fits easily under our $1,000 limit. And if you put $1,000 in a 529 plan today for your newborn, in 18 years it would be worth $3,996, assuming an 8% return. For more, see our Find the Best 529 Plan tool.
-- Thomas M. Anderson
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