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What to Consider When Looking at a 529 Plan
By JLP | April 5, 2006
Here are some things to consider when selecting a 529 Plan:
1. State income tax treatment of contributions and qualified distributions (in the case of contributors who are state residents).
Since I live in Texas and don’t have state income tax, I don’t have to worry too much about this one. However, for those of you who do have state income tax, it would be smart to find out how your state treats its 529 plan. Most likely, there will be perks to using your own state’s plan. However, be sure to consider your plan’s fees in addition to the tax implications. It won’t do you any good to have tax benefits but extremely high fees.
2. Available investment options and investment manager.
This ties in with the first point. Find out who the mutual fund provider for your plan is. Order a prospectus and read it THOROUGHLY. A lot of plans won’t allow you to make changes to your investment choices so you want to make sure you pick the right mix in the beginning. An age-based choice, which adjusts the asset allocation as the beneficiary ages, may not be a bad way to go.
3. Fees charged (annual expense ratio).
If your fees are particularly high for your state’s plan, you might want to go elsewhere to find a less expensive alternative. New York’s 529 plan, which is managed by Vanguard, has a management fee of .56% (it will reduce to .55% once assets reach $5 billion).
4. Flexibility.
Make sure the plan can be easily rolled to another plan if necessary. Also find out how hard it is to change a designated beneficiary. These two items you don’t want to find out AFTER you have already started investing in the plan.
5. Maximum contributions allowed.
The New York plan mentioned above, will allow contributions until the individual plan reaches $235,000 from ALL sources. In other words, if little Johnny is the named beneficiary of a 529 plan and grandpa and grandma, mom and dad, and aunts and uncles all contribute to the plan, they may do so UNTIL the balance reaches $235,000.
6. Expenses covered.
Most plans should cover tuition, fees, books, supplies, and equipment.
7. Protection from creditors.
Make sure the plan is protected from creditors.
For more information on 529 plans, check out SavingForCollege.com. Also, I modified my list from a list I found in Personal Financial Planning – Seventh Edition
Topics: College Funding, Financial Planning | 2 Comments »
April 6th, 2006 at 7:46 pm
Good advice regarding finding a plan with low fees. I am in the Illinois program where the fees seem high. My question is whether one can switch from the high fee Illinois program (after taking the state tax deduction a few years ago) to a low fee state without having to pay back the tax deduction (which might make it prohibitive to do so)
April 7th, 2006 at 5:32 am
Star Money Articles for the Week of April 3
Here are interesting posts and news this week from the MoneyBlogNetwork members and beyond: MightyBargainHunter tells of his three flea market finds, all for a dollar. Five Cent Nickel says his house is on the market. Blueprint for Financial Prosperity