Tax advantages of using 529 plans to save for child's education?
There are several variables to consider. Taxes, fees, returns. Taxes come in two stages. While adding money to the account you can save on state taxes, if the account is linked to your state. If you use an out of state 529 plan there is no tax savings. Keep in mind that other people (such as grandparents) can set aside money in the 529 plan. $1500 a year with 6% state taxes, saves you $90 in state taxes a year. The second place it saves you taxes is that the earnings, if they are used for educational purposes are tax free. You don't pay taxes on the gains during the 10+ years the account exists. If those expenses meet the IRS guidelines they will never be taxed.  It does get tricky because you can't double dip on expenses. A dollar from the 529 plan can't be used to pay for an expenses that will be claimed as part of the education tax credit. How those rules will change in the next 18 years is unknown. Fees: They are harder to guess what will happen over the decades. As a whole 401(k) programs have had to become more transparent regarding their fees. I hope the same will be true for the state run 529 programs.  Returns: One option in many (all?) plans is an automatic change in risk as the child gets closer to college. A newborn will be all stock, a high school senior will be all bonds. Many (all?) also allow you to opt out of the automatic risk shift, though they will limit the number of times you can switch the option. Time horizon Making a decision that will impact numbers 18 years from now is hard to gauge. Laws and rules may change. The existence of tax breaks and their rules are hard to predict. But one area you can consider is that if you move states you can roll over the money into a new account, or create a second account in the new state. to take advantage of the tax breaks there.  There are also rules regarding transferring of funds to another person, the impact of scholarships, and attending schools like the service academies. The tax breaks at deposit are important but the returns can be significant. And the ability shelter them in the 529 is very important.
"From IRS Publication 970 Tax Benefits for Education Note: Qualified tuition programs (QTPs) are also called ""529 plans.""  Changing the Designated Beneficiary There are no income tax consequences if the designated beneficiary of   an account is changed to a member of the beneficiary's family. See   Members of the beneficiary's family , earlier.  Members of the beneficiary's family. For these purposes, the beneficiary's family includes the   beneficiary's spouse and the following other relatives of the   beneficiary. regarding ownership changes: Rollovers Any amount distributed from a QTP isn't taxable if it is rolled over   to another QTP for the benefit of the same beneficiary or for the   benefit of a member of the beneficiary's family (including the   beneficiary's spouse). An amount is rolled over if it is paid to   another QTP within 60 days after the date of the distribution. Don't report qualifying rollovers (those that meet the above criteria)   anywhere on Form 1040 or 1040NR. These aren't taxable distributions. Example. When Aaron graduated from college last year, he had $5,000 left in his   QTP. He wanted to give this money to his younger brother, who was in   junior high school. In order to avoid paying tax on the distribution   of the amount remaining in his account, Aaron contributed the same   amount to his brother's QTP within 60 days of the distribution. So it appears that as far as the IRS in concerned the rollover could be done to change ownership as long as the beneficiary was in the same family. It is possible that there could be a state tax issue with the change of ownership, if it changed from a plan in state A to one in state B; and state A treated the original contributions as a tax deduction. So check the guidelines for the specific 529 plan." If I were in your shoes (I would be extremely happy), here's what I would do: Get on a detailed budget, if you aren't doing one already. (I read the comments and you seemed unsure about certain things.)  Once you know where your money is going, you can do a much better job of saving it. Retirement Savings: Contribute up to the employer match on the 401(k)s, if it's greater than the 5% you are already contributing. Open a Roth IRA account for each of you and make the max contribution (around $5k each).  I would also suggest finding a financial adviser (w/ the heart of a teacher) to recommend/direct your mutual fund investing in those Roth IRAs and in your regular mutual fund investments. Emergency Fund With the $85k savings, take it down to a six month emergency fund.  To calculate your emergency fund, look at what your necessary expenses are for a month, then multiply it by six.  You could place that six month emergency fund in ING Direct as littleadv suggested.  That's where we have our emergency funds and long term savings.  This is a bare-minimum type budget, and is based on something like losing your job - in which case, you don't need to go to starbucks 5 times a week (I don't know if you do or not, but that is an easy example for me to use).  You should have something left over, unless your basic expenses are above $7083/mo. Non-retirement Investing: Whatever is left over from the $85k, start investing with it. (I suggest you look into mutual funds) it.  Some may say buy stocks, but individual stocks are very risky and you could lose your shirt if you don't know what you're doing.  Mutual funds typically are comprised of many stocks, and you earn based on their collective performance. You have done very well, and I'm very excited for you. Child's College Savings: If you guys decide to expand your family with a child, you'll want to fund what's typically called a 529 plan to fund his or her college education.  The money grows tax free and is only taxed when used for non-education expenses.  You would fund this for the max contribution each year as well (currently $2k; but that could change depending on how the Bush Tax cuts are handled at the end of this year). Other resources to check out: The Total Money Makeover by Dave Ramsey and the Dave Ramsey Show podcast. Have you looked at 529 plan yet? There are tax benefits with it and you can roll over the remaining funds from your first child's account into your second child's, etc. Read this article to get yourself up to speed for this plan. Coverdell Education Savings Account is another plan you can look at. The Wikipedia article talks about the similarities and differences, so I won't repeat here. "There is a basic difference between saving for voluntary retirement (i.e. choosing to do things other than work even though you could still work) and the need to save for later in life in general. Regardless of how much you like your job, a time will eventually come when you are no longer able to work, and you will need an alternate source of income to live from at that point. Unfortuately, this is also the time when most people generally have the highest medical bills as well, and may need other services such as long-term nursing home care. So even if you plan to work as long as possible, a retirement fund is an excellent way to plan for these needs as it is tax-advantaged and many companies offer matching contributions. I would simply recommend that you see ""retirement accounts"" as a good way to accomplish your goals - you don't have to use them to create a ""typical"" retirement. Once you've taken advantages of the match and tax subsidies, you may also wish to consider saving for an annuity. Fees can be high, so you will need to do your homework (generally, you want to wait and buy an immediate annuity), but this is another way to turn savings into guaranteed income once you need to stop working. Best of luck!" "Thank God you have your child back, it is so awesome that you finally found a medical treatment that worked.  It must have been a truly trying time in your lives.   That situation is an important template in personal finance.  Through no fault of your own, a series of events occurred that caused you to spend far more money then you anticipated.  Per your post this was complicated by lost income due to economic situations.   What is to say that this does not happen again in the future?  While we can all hope that our child does not get sick, there are other events that could also fit into this template. Because of this I hate all options you present.  Per your post, you are pretty thin with free cash flow and have high income, and yet you are looking to borrow more.  That is a recipe for disaster with it being made worse as you are considering putting your home at risk. The 20K per year per kid sounds like a live at the university state school; or, a close by private school.  Your finances do not support either option.  There are times when the word ""No"" is in order when answering questions.   Doing a live at home community college to university will cost you a total of about 30K per kid rather than the 80K you are proposing.  Doing this alone will greatly reduce the risk you are attempting to assume.  Doing that and having your child work some, you could cash flow college.  That is what I would recommend. Given that you are so thin, you will also have to put constraints on college attendance.  No changing major three times, only majors with an employable skills, and studying before partying.  It may be worth it to wait a year of two before attending if a decision cannot be made. I was in a similar situation when my son started college.  High income, but broke.  He worked and went to a community college and was able to pay for the bulk of it himself.  From there he obtained a job with a healthy salary and completed his degree at the University.  It took him a little longer, but he is debt free and has a fantastic work ethic." Congrats on saving aggressively when you're young. I'm not a huge fan of tax-advantaged accounts because the rules can change on them, and there's already a penalty for you to take out that money for most purposes until you've almost tripled your age. Free money (a match) overcomes this reservation for me, but I'm not contributing anything beyond that.  I'm paying my taxes on the rest and am done with them. Watching your money grow tax-free for another 37 1/2 years only to see your (and everyone else's) marginal tax rate rise isn't much fun.  I'm not saying that will happen, but it certainly could. "The first article you link clearly refers to Warren Buffet and doesn't, in regard to taxes, refer in any way to Berkshire Hathaway. The second article you link is titled, ""Ways Professional Traders Can Save Big At Tax Time."" Berkshire Hathaway is not a firm primarily engaged in trading. It is engaged in investing in companies that it feels offer long-term growth and appreciation. In some cases, their investment is in the entire company; in others, a very large percentage of its total capitalization. Trading, on the other hand, involves buying stocks, bonds, futures, etc. for near-term resale, ideally at a profit. Stock speculation is a risky and complex occupation because the direction of the markets are generally unpredictable and lack transparency.  As has been mentioned above, we are confident that Berkshire Hathaway use every technique at its disposal to reduce its tax burden. I am confident, as well, that they spend considerable effort and expense to be certain that they are never discovered making errors in their tax returns." "One reason is that you can trade in the IRA without incurring incremental taxes along the way.  This may be especially important if you intend to shift your portfolio allocation as you approach retirement.  For instance, gradually selling stocks and buying bonds can incur taxes if you do it in a taxable account (if you do it while you have other income and thus may face capital gains taxes).  Also, if you have mutual funds in a taxable account, they may distribute capital gains to you that you'll owe taxes on, but holding the funds in an IRA will shield you from that. There are also some other side benefits to IRAs because they are considered to ""not count"" for certain purposes when determining what you're worth.  For instance, if you go bankrupt, you could be forced to sell assets in taxable accounts to pay your creditors, whereas IRAs are protected in many cases.  Likewise, if you try to get financial aid to pay for college for your kids, money in an IRA won't be counted among your assets in determining your aid eligibility, potentially giving your kids access to more aid money. Finally, an especially prominent benefit is, paradoxically, the early withdrawal penalty.  For many people, part of the purpose of an IRA is to ""lock away"" their money and prevent themselves from accessing it until retirement.  Early withdrawal penalties provide a concrete consequence that psychologically deters them from raiding their retirement savings willy-nilly."