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How do you start a relative's college fund?

October 18, 2012: 6:30 AM ET

What's the best way to start a college fund for my infant nephew? His parents live in a different state. — Mitch, Fort Worth

Put money in a state 529 plan; investments grow tax-free, and cash can be pulled out for higher education untaxed. You can invest in most states' plans no matter where you or his parents live. While 34 states, plus Washington, D.C., let you deduct contributions from your taxes (usually only if you use a home-state plan), that shouldn't factor into shouldn't factor into your decision, since Texas has no income tax.

A good, inexpensive choice is Utah's Educational Savings Plan, with expense ratios as low as 0.18% for out-of-state residents. SavingforCollege.com's Joseph Hurley suggests investing in an age-based fund, which would cut risk as your nephew nears freshman year.

— Ryan Derousseau

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