Advantages of 529 plans
1. Although
contributions aren’t tax-deductible (at least not on federal tax
returns), earnings grow tax-free. Starting with passage of the 2001 federal
tax law, withdrawals to pay for tuition or college expenses are free of
federal income taxes, too.
2. Unlike
Education IRAs, contributions to 529 Plans are not sharply limited. The
maximum contribution, which differ from state to state, can be as much as
$235,000.
3. Assets in
529 Plans don’t have a major impact on financial aid, in contrast to
prepaid tuition plans (and Education IRAs). As Kiplinger’s Personal
Finance notes, “Though Congress may eventually change the rules,
prepaid plans are treated more severely than savings plans under federal
financial-aid formulas. Prepaid plans are considered a ‘resource’
that reduces a family's aid eligibility, dollar for dollar. Savings plans
are treated as a parental asset, of which only 5.6% is considered available
to cover college costs each year.”
Difficult
choices
The financial
planning community can’t come up with a simple set of recommendations
about 529 Plans, because new ones keep popping up and because the advantages
and disadvantages of a specific 529 Plan depends on which state you’re
from, and what the state tax laws are. As a result, parents won’t yet
find a comprehensive Web site that provides all the information an investor
would want to know before choosing a 529 plan. Here are some Web sites that
come closest to that goal.
Saving for College with 529
Plans*.
This site provides the most  comprehensive
ratings of 529 Plans, based on the book “The Best Way to Save for
College” by Joseph F. Hurley, CPA. Each state plan gets a "one-cap"
to "five-cap" rating based on an evaluation of its overall
usefulness and flexibility, but (wisely) not on past investment performance.
The site does list the plans’ quarterly investment results, however,
plus an extensive list of articles on various topics related to saving for
college. (* Sensible-Investor is a partner of the SavingForCollege site and
receives a percentage of any purchase by visitors who arrive via the link
above. That link goes to SavingForCollege’s online store -- from
there, follow the links at the bottom of the page to get to the
SavingForCollege home page and the site’s abundance of useful
information.)
Morningstar
Inc. Now that the Morningstar investment research firm has expanded from
mutual funds into 529 plans, parents will benefit from its reliable data and
usually reliable advice. The site includes commentary about how to choose a
plan and extensive data about each state's offerings. Sortable charts show
each plan's investment limits, investment management company, total assets,
fees and expense ratios, state tax status, and other useful information. But
pay no attention to Morningstar’s references to its four- and
five-star funds -- those
ratings of funds' past performance aren’t a reliable predictor of
future returns.
College
Savings Plan Network. No value judgments here. This network, created by
the National Association of State Treasurers, provides an overview of states’
529 Plans (which it labels simply “savings plans”) and prepaid
tuition plans (also authorized by Section 529, but
Sensible-Investor
A quick
introduction: Why most personal finance magazines, television
shows and Web sites give crummy investment advice.
Overview of what
Sensible-Investor has to offer for serious, long-term
investors.
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a completely different type of
program). The site also provides links to each plan’s Web site.
A strategy
for choosing
Kiplinger's
magazine has two recommendations to help parents sort through the daunting
range of 529 Plans:
1. Maybe
stay at home. Stick with your own state's plan if state income taxes are
high and you can deduct 529 Plan contributions, as in New York and Michigan.
The
SavingForCollege.com
site lists each state's laws on
state-tax-deductible or non-deductible contributions and on
state-tax-exempt or non-exempt withdrawals.
2. Four
good ones. If you're looking out of state, Kiplinger's suggests the
following four 529 Plans as strong possibilities to consider, because they
offer a healthy combination of flexible investment options, appropriate risk
management, and low expenses.
- Kansas Learning Quest
Education Savings Program.
- College Savings Plan of
Nebraska.
- New York's College Savings
Program.
- Utah Educational Savings
Plan Trust.
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