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.
Finance experts can point to hundreds of options for 529 savers, considering their investment class, location and strategy, 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 analyzed a myriad of 529 savings plan cost structures in 2013 and found that, for the most part, expenses for 529 plans continue to exceed those of the average mutual fund. For reference, the total fees for many 529 plans are 20 basis points above a comparative mutual fund, and analysts suggest that these fees are part of what has lead to relatively low contribution trends.
The company also found that the flow of assets into 529 plans rose 25% from 2011 to 2012, and that investors favored conservative allocations, as well as bond-heavy plans.
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 http://www.savingforcollege.com
Making investment choices: Once you select 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: Currently the IRS offers federal tax exemptions for qualified 529 withdrawals, for a wide range of expenses; these typically include the costs of tuition, room and board, and learning aids such as textbooks. In 2013, the IRS also unveiled a wider allowance of qualified withdrawals for laptop computers and other devices used for education.
Rising college costs: 2013 numbers from the College Board showed that college tuition and fees continue to outpace the rate of inflation. With average increases of over 10% for private schools, and over 20% for public colleges from 2009-2013, higher education cost hikes continue to plague families as well as state and federal officials looking at education issues.
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 plan choices on your taxes, retirement savings strategy, or other financial issues.
If you are forced to choose between funding a 529 plan or saving for your own retirement, the 529 plan is probably a bad idea. It is important to understand your situation, prioritize goals and seek professional advice, if needed.
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