Bushman's students, among the best and the brightest in the New York City public school system, notice that the index rarely rises above 10%.

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But many families can wring even more tax savings from a 529 by investing it all along in taxable bonds--whose interest would otherwise be taxed at a federal rate of up to 40% (including the effect of an itemized deduction clawback)--and holding index funds or individual stocks in their taxable accounts, says Yale School of Management professor Matthew Spiegel.

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