• The contributions are after tax dollars, but contributions grow federal tax free, as long as the money is used for "qualified higher education expenses";
• Each state is permitted its own plan; many state allow contributions to be withdrawn with the gains tax free from that states' own plan, again for qualified higher education expenses;
• There is virtually no limit to the amount which can be gifted. While federal law requires states to set contribution limits, and many states have these contribution limits, There is generally no restriction to signing up for another states' plan if you happen to "limit out" in your own (which is not, I would add, generally a problem). Or, perhaps you prefer the plan offered by another state. You may not have state tax advantages in using another states' plan, but it still might be worth it (however, confirm this with your state to make sure that you are not running afoul of any local restrictions);
• You may "rollover" money from one state plan to another. The new College Savings Account must be funded within sixty (60) days, like an IRA. One rollover may take place in any 12-month period, per college savings account. IRC § 529(c)(3)(C)(iii);
• A "trick": If you do not like your state's plan, enroll into another states' plan, and then do a "rollover" into the plan sponsored by your own state as your child reaches college age.
One "problem" with 529 Plans: You are given a basket of securities, but you do not actually have the right to "investment control." The most control that you can exercise is through a general basket of securities, professionally managed. Usually the basket of securities is based upon the age of your child (more aggressive investing for younger children, but less as they advance toward college age). Sometimes you are permitted a percentage equity option -- like 70% equities vs. 30% more conservative investments, etc.
However, I count the lack of investment control over specific investments to be an advantage. All too often, I think, we overestime our investment skills. My suggestion: Just leave it to the professionals to worry about.
The California state plan is offered through Scholarshare which previously used TIAA-CREF as their management company. Happily, at least in my opinion, this coming November (2006)management is being transferred to Fidelity Investments. Here is Scholarshare's press release on the issue:
Beginning November 2006, the ScholarShare College Savings Plan will begin partnering with a new program manager, Fidelity Investments, one of the world’s largest providers of financial services. The new contract with Fidelity - which currently manages more than $8.1 billion in college savings dollars for families across the country - will enable ScholarShare to offer lower fees, better account access and more investment options to California families. TIAA-CREF Tuition Financing, Inc. (TFI) will continue to manage ScholarShare until TFI’s contract expires this November.
I like Fidelity Investment's operation costs (relatively low) and their service. No matter what, however, strongly consider using your states' -- or another state's College Savings Account -- even if you can only invest a little. It will grow.