When building a college fund, think of a 529 account as part of your overall portfolio. One strategy would be to put part of your fixed-income allocation into a tax-free 529 plan.
If this is done with a low-cost plan (such as Michigan’s) you have an economical way to avoid the high taxes associated with taxable bonds. Aside from the tax advantage, if college tuition is a relatively few years away, the certainty of fixed-income may be more appropriate than stocks for building a college fund.
Your stocks could be held outside of a 529 plan. This may allow you to deduct losses, which are much more likely with equities than fixed income.
If you need to cash in stocks to help pay for college, you can give appreciated securities from your own accounts to your child, who probably will be in a lower tax bracket. In fact, if the securities have been held more than five years, your child likely will owe only 8 percent tax on any gains.
