I came across an article in the Miami Herald that has been bothering me about 529s as I have been researching. That is that they seem like mutual funds with a specific purpose (ie - to save for college), but picking ones that perform well and without fees that eat up the gains is a tough task. Maybe simply placing the money into a S & P 500 index fund (forgoing the tax benefit of it growing debt free) is a smarter move. Some of the points that article made:
Among the all-stock investment options offered by the (state sponsored 529) plans, Hurley said, performance varied by huge margins, with the best-performing plans earning more than 11 percent a year on average over the last three years and the worst registering gains of just 4.4 percent. Over the same time period, the Standard & Poor's 500 stock index returned 12.02 percent a year, according to Ibbotson & Associates, a market research firm based in Chicago.
That tells me that over the last three year that the 529s have been in existence, I would have been better in an index fund since it performed better than the very best of the 529s. In addition:
Some of the plans offer convenience and good investment options, but they're almost always more costly than simply investing in a mutual fund, said Hurley. His research indicates that the average plan charges higher management fees than a similar mutual fund. That difference adds up over time and is worth paying only if you're getting enough in the way of tax breaks to compensate for the additional costs.
So not only does the stock index fund perform better, stock it also has fees much lower than any of the state 529 funds. With this in mind, the 529 plans begin to lose some luster (even with the tax free compounding). Add onto that
...But those tax breaks may be small unless parents invest large sums for college -- the write-off is based only on the earnings from the 529, not the amount invested. Meanwhile there are significant tax penalties for using 529 assets for anything but higher education.
While I keep assuring everyone that I will use this savings for college, it might be nice to have a bit more flexibility. I also need to do more research about the government credits and how a 529 plan would affect them:
Then, too, middle-income taxpayers could be giving up tax credits when they pay for college with 529 assets, said Greenberg. The federal government offers the Hope Scholarship and Lifetime Learning tax credits for paying for college. But those who finance college with tax-free savings can't use the credits, because the government considers it double dipping. In some cases, the lost credits would be worth more than the tax-free income.
All this goes to show that I need to do some more research before committing to any investment plan. It's good that my uncle will be investing the money in antiques for the time being to give me more time to research this all more thoroughly.