I am trying to decide on a college savings strategy for kids 1 and 3 years old, for initially around $10k per year. I'm considering the state 529, but leaning towards a pair of roth iras, via backdoor conversion, as the vehicle.
For the 529 option, my state marginal tax rate is either 6 or 6.5%, depending on the year, and i can take a deduction on up to $10k per year. However this benefit gets taxed on the subsequent year's federal return at a 33% marginal rate, so the state deduction has an effective value around 4%. Additionally, my state's 529 plan is decent but not stellar when it comes to investment options and fees. However, there is no recapture tax (or other fees as far as i can tell) on contributions later transferred out. So i could presumably do periodic transfers out to a better plan out-of-state.
The Roth option would allow me to invest at lower cost with greater flexibility. I understand Roth accounts are invisible to the fafsa as long as funds are not withdrawn. So the plan would be to take out student or home equity loans to pay for school initially, then cash out the roth accounts after school to pay down debt. I also appreciate the roth ira for its general flexibility, i.e., it doesn't have to go toward college if plans change.
Is the 529 really worth that tax deduction in the first year? is there anything i'm missing? thanks!