Participants contribute up to the limit set by the plan. Best of all, many states don't tax the earnings, so the account can grow more quickly than regular savings. So if you are in the 30 percent tax bracket, you'd have to get a pretax rate of return of 6.38 percent to equal a plan's 5 percent return over the same 18-year period, says Bernard Kent, a tax partner at PricewaterhouseCoopers. The tax status of Iowa's plan was the hook for Karen and George Carroll of Johnston, Iowa. The couple bought the plan for their two daughters after being hit with hefty taxes on the capital gains they made from mutual funds set aside to pay for college.
Many plans allow other family members or friends to contribute to the account.
So a grandmother in Illinois can buy her state's plan for her grandson, even though he lives in Texas. Connecticut, Delaware, Indiana, Iowa, Massachusetts, Montana, New Hampshire, New York, Rhode Island, and Utah have flexible plans that are open to residents of any state. Going outside your own state plan has risks. You can miss out on tax deductions your home state's plan may offer. Unlike an IRA, a tuition plan gives you little choice in how the money is invested.