College in 5 years - where to invest 25K - 529? Municipal bonds?

[fabdan]

Hi Mustachians!

I have an extra $25K in a saving account (taxable) which are earmarked for my kids college education.
I am wondering the best way to invest this knowing that my kids are 12 and 10 years old (i.e. college is not that far away) and my state (MN) had a recent change for the 529 (http://www.savingforcollege.com/529_news/?page=plan_news&plan_news_id=1395)... up until now I used a portion of the RothIRA for education money, we never used 529s.

is it worth using a 529 for this money with a stock market at all high? Should I contribute in a new 529 just to get the new deduction in my state i.e. $3000 invested I believe?
I am also considering using some municipal bonds (fed tax exempt) in my taxable for this money [maybe NEA, NIO...]. Anybody done that?

Would love to get mustachians advice / opinion on this? thanks all

[MDM]

I'd probably put at least the maximum state-tax-advantaged amount into the 529 each year, because it is a relatively small amount.  Up to you to understand whether the deduction or credit is better for you.

After that, it depends which rule of thumb you want to follow:
a) the stock market, on average, goes up more than money markets so invest the 529 amount in some stock fund
b) the stock market sometimes goes down, so put money you need "soon" into safer investments (e.g., money market fund in the 529).

The definition of "soon" is best judged in hindsight.  Some will say "3 years", others "5 years", etc.

[fabdan]

Thanks MDM.

I am going to start by opening a Vanguard 529 with $3,000 to get the deduction - this seems like a no brainer (will at least do this every year from now on).
I will probably also put about $9,000 into 3 different municipal bonds CEF (seems like now is no too bad time for NEA, IQI or IIM since they are at a discount to NAV and yielding around 5%). Obviously not expecting any growth but 5% fed. tax free is good anytime.
I may invest the rest in a taxable account holding recession resilient dividend stocks. Still chewing on this...

Any other ideas? (except rothIRA since will be maxed already)