Q. I have a 9-month old son and I'm about to add money to his college savings account. I understand the tax advantages of a 529 account. However, I'm fearful of handing my money over to a state based plan with all the rules, regulations and fees.

I went through a quick spreadsheet exercise to see the equivalent taxable return premium I would need to earn to keep the money in a normal account over a 15-year period. To my surprise it was a little over 1 percent a year.

It sounds crazy but I would rather forgo the tax savings to preserve my financial freedom.

Am I crazy?

---J.J., by e-mail


A. If it is crazy to take investment expenses and taxes seriously then you are stark raving mad. That makes you the kind of person who drives the people who sell investment products crazy. You've done the calculations the sales team doesn't want you to do.

Even if you could choose 529 plan investments that are as low cost and tax efficient as an index fund (and there are places it can be done) the freedom offered by keeping the money in a taxable account offsets the cost in current taxes--- as long as dividends and capital gains are taxed at 15 percent.

Suppose we pretend that your son is now entering college and that you had started saving $100 a month in Vanguard 500 Index fund 15 years ago, in January 1989. Your $18,000 in contributions would have grown to $39,492 if you had paid taxes at a 15 percent rate on $4,568 of dividend and $812 of capital gain distributions. Your total tax bill during the entire period would have been less than $900. While there are unrealized tax liabilities in the $39,492 accumulation, they could be minimized by careful transfers to your son. (These figures come from Morningstar Principia software, which allows the creation of hypothetical portfolios.)

It's always good to remember that not everyone goes to college. Under current tax law, I believe you can retain maximum flexibility by using a combination of iSavings Bonds and tax efficient index funds.


Q. We were just married and both own a home. My husband is selling his home. He should clear about $60,000 from the sale. We both invest the max we can in our 401k plans and make yearly IRA contributions. We have mutual funds, bonds, and savings. I'm 42 and he is 37. We have a combined net worth of about $300,000.

Our question: what is the best use of the $60,000? I see we have four options. We can pay off the balance on my home, about $48,000 at 6 percent. We can invest in mutual funds and hope we earn more than 6 percent. We can put the money in CDs. Or we can buy a condo for future use in retirement or buy land for building on later.

What do you suggest?

---C.T., by e-mail from Dallas


A. Take the conservative route. Pay off the mortgage. Unless you have very high charitable contributions to boost your itemized deductions, the odds are your homeowner deductions don't come close to the $9,700 standard deduction for a joint return. That means you are paying a straight 6 percent interest, a rate you'd have great difficulty duplicating in any fixed income investment.

Paying off the mortgage would do a number of things for you. It would free up additional cash flow that could be committed to a Roth IRA. If you put the house in joint title it would give your husband something for the equity he gave up.

Finally, having no mortgage on your primary house would put you in a good position for financing a future retirement home--- something you can do after you've been married a while and know how to read on the same page.