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Saving for College
Crash Course On College Savings Plans
By Danny Noonan
Wealth Advisor, Carson Wealth Management Group
Investing education dollars in a tax-free, state-sponsored 529 college savings plan may be a no-brainer. Choosing the right plan can be a brain-rattler.
More than 70 plans exist nationwide, and investment options seem to multiply daily. Fees and expenses also vary widely, and signing up for a plan is only the first of many crucial decisions. Here are a few things to consider.
Selecting a plan: All 529s carry several layers of costs, with fees for enrollment, account maintenance, and program and investment management. A high-cost plan could cut a percentage point or more from your annual returns – a significant drain over the long term.
Research firm Morningstar recently analyzed a myriad of 529 plan cost structures and determined what different plans charge for the same portfolio option – a 50/50 allocation between stocks and bonds. Expenses ranged from a low of 0.7 percent to almost 3 percent. Morningstar concluded that anything below 1% is reasonable.
State tax incentives also must be considered. Some states offer residents deductions for 529 contributions, and others even match a portion of what you save. Even more important are a plan’s investment choices, which vary from age-based portfolios that automatically shift assets from equities to bonds as students approach college age, to an almost infinite array of fixed or mix-and-match portfolios. To check out the different low cost plans, go to www.savingforcollege.com.
Making investment choices: Once in a plan, you have to choose how to deploy your assets. That may mean overcoming reluctance to put most of the money in stock, even though your child is still in diapers. Or you may need someone to discourage you from going for broke with an aggressive portfolio when the first tuition bill comes due in just a year or two. And if you’re not in an age-based portfolio, you’ll need help making annual decisions about adjusting allocations or rebalancing.
Handling distributions: The current federal tax exclusion on qualified 529 withdrawals is set to expire at the end of 2010, and financial aid formulas that favor 529 plans – counting them as parental assets and not reducing future aid when distributions boost a student’s income – could also change. Congress could act to keep 529 benefits in place, but you’ll still need to stay on top of these developments and possibly fine-tune your strategy.
Rising college costs: In the latest sign of spiraling education costs, the College Board reported last month that college tuition and fees rose from a year ago at twice the rate of inflation. It also found that students are relying more heavily on student loans rather than outright grants.
The big picture: College savings should be viewed in the context of your total financial picture. You may need to weigh the impact of 529 choices on your taxes, retirement savings strategy, or other financial issues.
If you are forced to choose between funding a 529 and saving for your own retirement, the 529 is probably a bad idea. It is important to understand your situation, prioritize goals and seek professional advice, if needed.
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