When the Pension Protection Act of 2006 made 529 college savings plans a permanent part of the tax code, it ended most debate about the best way to invest for educational expenses. However, there are dozens of state-sponsored plans to consider, each varying in everything from investment choices and performance to plan costs and tax advantages. Understanding the differences can help you find a plan that makes the most of your college savings.
All 529 plans offer these benefits:
Get past the basics and differences among plans emerge. A distinguishing feature is whether the plan is sold directly to investors or through a financial advisor. Savingforcollege.com and Morningstar.com provide databases of 529 plans and guidance on plan selection. Savingforcollege rates effectiveness on a one- to five-cap scale, and each year Morningstar names the country’s five best and worst plans. In both cases, evaluations are based on several criteria:
Costs. Some plans dun you for enrollment, account maintenance, and program management charges, while others charge only for your underlying investment expenses, which may range from a few basis points annually to nearly 2%. Each basis point equals 1/100th of a percent. Comparing 10-year costs on a $10,000 investment, Savingforcollege found overall expenses ranging from $0 (for investing in one state’s fixed-earning plan) to $2,616. Since fees are a steady drain on investment performance, it makes sense to choose a low-cost plan.
Investment options. Whereas some plans offer just one or two kinds of investments, others provide a broad range of choices. In some cases, your money will be managed as part of a state pension fund. Other possibilities include age-based portfolios that dial down risk as a beneficiary approaches the start of college; static portfolios pegged to investors’ risk tolerances or classified by asset type (equity, fixed-income, balanced); menus of individual index or actively managed mutual funds; and money market funds. You’ll want a plan that gives you well-diversified choices from a well-regarded fund family. And again, low expense ratios are essential.
Perks for state residents. Many states make plans available to out-of-staters; but all else being equal, an in-state plan may be preferable since it often provides tax deductions or credits for contributions and even contribution matches for low-income residents.
Other advantages/disadvantages. Most 529 plans let you enroll, fund plans, and check balances on the Web. A few plans restrict ownership changes, and a handful of states let out-of-state enrollees pay in-state tuition. Some plans have agreements with outside credit-card rewards or scholarship programs that can add to savings.
All of these criteria, useful for evaluating a prospective plan, can also help you gauge the effectiveness of an existing 529 plan. If yours comes up short, plan-to-plan transfers are usually allowed once every 12 months, and?you can establish multiple accounts with different plan sponsors for a single beneficiary. You may also want to explore other savings vehicles like Upromise.com, where you get a kick-back for consumer products that you buy.
You should consider a plan's investment objectives, risks, charges, and expenses carefully before you invest. The issuer's official statement contains this and other information about the plan and should be read carefully before investing. Investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other benefits that are only available for investors in such state's qualified tuition program. A prospectus may be obtained from your advisor or from the fund company directly.
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