Investing for a grandson's education

NEW YORK (Money magazine) -- Q: We'd like to invest $100 a month for our new grandson's education. What's the best way to do it? -- Shari J., New Orleans

A: Go with a 529 college savings plan. Your investment grows tax-free, and withdrawals are tax-free as long as the money is used for higher ed. And if your grandson doesn't need all the funds in the account, you can name another beneficiary later -- a future grandkid, say. But if you think your grandson might eventually have a shot at financial aid, his parents should open the 529, not you.

In aid formulas, parental assets are treated lightly. But distributions from a 529 in your name would be considered student income, which is heavily assessed. That would knock down his award.

Louisiana's 529 is a good one_ -- fees max out at 0.3% of assets, and the state matches contributions (2% and up, depending on your income). What's more, the plan offers age-based portfolios, which shift funds from stocks to bonds as a child approaches college.

These popular options, notes Joe Hurley of savingforcollege.com, "are good for people who like an autopilot approach that ratchets down risk."

In Louisiana you can contribute to someone else's 529. Or you can write a check to your grandson's parents.

A $100-a-month gift is well below the $13,000 annual gift-tax exclusion. While your local plan is top-notch, as a rule 529 investors should shop nationally too. Even though many states offer residents tax perks, those breaks can't always make up for high fees. See compare 529s at savingforcollege.com.