529 College Savings Plans
529 Plans, also called Qualified Tuition Plans, are the vehicle of choice for investing college savings because their tax advantages surpass any alternatives. One exception is if your young scholar is very near college age, in which case setting up a 529 Plan may not be worth the hassle. Also, some 529s have received some negative publicity because of high fees and self-serving sales tactics among some of the financial planners who sell these plans. But the offending states and firms are cleaning up their acts and lowering their expenses to boot.
Should you set up a 529 Plan in the first place? Don't put any money into a 529 Plan, or any other college savings account, for that matter, until you have contributed generously to your workplace retirement savings plans and IRAs. Saving for retirement is simply too important to put your retirement savings on a sabbatical in order to fund college savings plans.
Choosing the right plan. Every state offers at least one plan, and your own state's plan may – or may not – be the best choice. If you deign to put money into a 529 Plan, here are some tips for selecting the right one:
- If your own state offers tax breaks (about half do), opt for this plan unless the expenses are high or the performance is lackluster.
- Whether your home state offers tax incentives or not, compare expenses and performance of your own state plan against the plans of other states.
- If you're comfortable making your own decisions (it's not very complicated), select a 529 Plan on your own; if not, ask an investment advisor for help.
Managing the account. Unless you're really into actively managing all of your investment accounts, opt for the "age-based" 529 Plan alternative. The age-based option will automatically rejigger the investment mix as junior gets ever-nearer college age. In short, the younger the child, the higher the percentage of money in the plan that will be invested in stock. As the child nears college age, the percentage devoted to stock will gradually be reduced which makes a lot of sense because the last thing you want is to lose a lot of money from a stock market tumble just before those damned tuition bills have to be paid.
