Reply to 529 question - Maryland. Advice needed!

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[quote=Anonymous]Great that you're thinking about this while they're still young!  (Although why did you think the swipe at the US was relevant or necessary? Unless you meant lower college tuition abroad.)

Most states have (1) prepaid plans, and (2) investment funds, sort of like mutual funds. We made this choice over 15 years ago, so things may have changed, but here are the basics.

The prepaid plans guarantee tuition when your kid reaches college age, and most are transferable to out-of-state colleges if your kid takes that route. However, many prepaid plans assume a pretty conservative (i.e., low) rate of return. This is the assumed rate of return that they build into your contributions, as they compound over the years. This essentially shifts some of the risk and profit away from you and to the school.

For that reason, we went with the investment plan. These are like mutual funds, in that the risk and rewards go straight to you. On average, you will probably earn higher market returns, and end up with a bigger account balance at the end of the day, than with the prepaid plan. The risk is that the market will crash right before your kid goes to college, leaving you with a lower balance. To address these, states like Maryland have what are known as "lifecycle" plans that slowly and automatically shift you into less risky bonds as your kid approaches college age. Or, you can do this yourself, by starting out with the riskier portfolios and then shifting to more conservative investments when your kid reaches his teens, but the key here is you have to remember to do this and appreciate why it's a good idea, which is why the lifecycle funds work for many people.[/quote]

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