A state's limit will apply to either kind of 529 plan: prepaid tuition plan or college savings plan.
Assuming the 529 plan has a wide enough choice such that R are equal, you can tilt things in 529 plan’s favor by choosing a plan with low fees, choosing investments with high distribution rates and be in a high current income bracket. The second condition is that you have to wait long enough for the money in the 529 plans to grow enough to offset the tax penalty. Again for things to be in 529 plan’s favor, you have to wait long enough and withdraw the money when your future tax bracket is as low as possible; or to be more exact, when the differential between MR is as small as possible.Putting the numbers together Since no one can predict future tax law changes, an exact analysis is not possible.If you have accounts in more than one state, ask each plan's administrator if contributions to other plans count against the state's maximum.Some plans may also have a contribution limit, both initially and each year.And if you are fortunate enough to be in the 25% income bracket in retirement, it will take a long, long time (54 years to be exact), to exceed the corresponding 15% LT cap gain.
At this point, you’re probably thinking, “Why bother!Fortunately, there is much more, both in terms of the 529 vs.taxable plan comparisons and ways of utilizing the 529 for qualified educational expenses thus avoiding the 10% penalty. The current tax expense, TR Where D is the distribution rate; STportion and LTportion are the fraction of D that are short term gains or long term gains and dividends; STrate and LTrate are the current applicable short and long term marginal tax rates.D also includes any gains realized for rebalancing.Even at a low marginal rate of 10% ( 10% penalty), it takes 33 years for the 529 plan to catch up (.712 vs. However, if the future LT cap gain rate goes back to 10%, the break-even occurs after year 20. The difficulty of the task grows if your future brackets are higher.