In another approach, the allocation is age-weighted, gradually becoming more conservative over time. So a portfolio for a four-year-old might have 80% of assets in stocks. By the time, the child reaches 19, the fund will only have 10% of assets in stocks. The thinking is that savers cannot afford to hold risky stocks near the time when tuition checks are due.

You are free to invest in any state program you want. But some states provide big incentives to keep savers at home. Indiana offers tax credits of up to $1,000 annually for state residents who invest in the local program. Some states say earnings in 529 plans are free from state taxes, provided that the money is invested at home. If you live in a state like Texas, which has no state income taxes, there is no tax incentive to stick with the home state program. So you can shop for the investment that suits your taste.

A top choice is the Maryland College Investment Plan, which holds a basket of T. Rowe Price ( TROW) mutual funds. The Maryland age-weighted portfolio that is designed for youngsters who will attend college around 2018 has about 56% of assets in stocks and most of the rest in fixed income. The allocation is a bit more aggressive than its average competitor, which has 52% of assets in equities. The stock-heavy approach has boosted returns.

During the past 10 years, the Maryland portfolio returned 8.4% annually, while the average peer returned 7.2% annually. The portfolio has 22% of assets in T. Rowe Price Equity Index 500 ( PREIX) and 6.8% in T. Rowe Price Blue Chip Growth ( TRBCX). About 47% of assets are in T. Rowe Price Spectrum Income ( RPSIX), which holds a mix of bond funds.

Another strong choice is Utah Educational Savings Plan. The program invests primarily in Vanguard index funds. By sticking with low-cost investments, the plan offers total expenses as low as 0.18%.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.

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