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My thinking is that I am trying to balance the "sure thing" of paying at least some cap gains along the way against the possibility of a huge tax bite and/or penalties should things not work out as planned if the money were in a college savings 529.

I don't know if I see this as the "sure thing" that you do. I understand your thinking and it makes sense, but I don't buy it. This is way I see the tax issue of teh 529.

Right now, if you use it for qualified expenditure, it is a sure thing that you will pay no taxes. Qualified expenditures include just about everything for many plans - tuition, fees, books, room and board, etc.

As far as the future, I don't see the tax law changing. The public would be furious and politicians don't like that. It's a gamble I'm willing to take.

As far as taking it out for non-qualified reasons I see it two ways. The first, and most logical for me is that there probably won't be any money left over after paying for all these expenses. Tuition alone has been increasing, on average, 6.5% per year. A lot of degrees are now requiring more training - translation, more years in college, graduate school, etc. = more money to be paid.

Second, if there is money left over you can change the beneficiary to someone else, another child, a grandchild, a cousin, a brother, etc.

Third, if the beneficiary were to get a scholoarship I have the OPTION of taking that amount out penalty free, but I don't have to. I can keep it in. If I take it out, then yes, I'll have to pay taxes on it, but I did get tax free compounding up until this date. It works the same as any other retirement plan and I think it's great.

Fourth, if I really needed the money then I can, at my option, take the money out for an unqualified disperment and pay the 10% penalty on earnings and taxes on the earnings BECAUSE I NEED THE MONEY. If I didn't need the money I wouldn't do this and I'd be paying no taxes. If I did need the money, then it works like an additional retirement plan, only I'm penalized for the tax-free compounding. Well, depending on how many years I've been enjoying this tax-free compounding, I figure worst case sinario, I'm break-even with the penalty, so it's no real penalty. It's more like having this money in the bank for that many years. It could be worse.

So, that's my take, FWIW (probably what you just paid for it).

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