Choose the right 529 plan and you can send your child to college stress-free.
Saving for your child?s college education can be a monumental task. Thankfully, there is a tool that can help you set aside funds for future college costs. Popularly known as 529 plans, these college savings plans offer a hands-off, low maintenance and flexible approach to saving for college. The plans also offer unsurpassed federal and state tax breaks (34 states offer full or partial tax deduction or credit for plan contributors), and simplified tax reporting. In addition, by allowing the donor to stay in control of the account, you can be sure that the fund will be used for its intended purpose.
Despite the apparent benefits, 97% of Americans do not invest in 529 plans. According to the Government Accountability Office (GAO), only those who are extremely well off invest in these plans. Some of the reasons cited for the lacklustre popularity of 529 plans include the following:
- Limited investment options
- High fees
- High investment risks
- Complicated rules
Even with all these drawbacks, it cannot be denied that contributors can generate more tax savings in a 529 plan as compared to a taxable investment account. According to a 2009 study conducted by the Treasury Department, households in the top bracket can get a 39% boost in savings with a 529 plan while married couples who are earning from $137,000 to $209,000 typically get a 35% boost.
Choosing the Best College Savings Plan
Shopping around for the best college savings plan available can be tricky so consider these suggestions before making a decision.
- Consider the cost. Some 529 plans are laden with fund management fees and commissions so do your research to find one that charges the lowest fees and has the lowest expense ratio. For best results, choose direct-sold funds and stay away from broker-sold funds. Keep in mind that the less money that goes into the pocket of the broker or fund manager, the more money that goes into your child?s college fund.
- Know the rules. You can maximize your benefits and avoid tax penalties if you know the administrative, management and tax rules that go with your chosen plan. Consider which state offers the most attractive tax breaks and understand how you should use the proceeds of the fund to avoid getting hit by huge penalties.
- Look at the ratings. Take independent ratings from firms like SavingforCollege.com and Chicago-based financial information rating company MorningStar to guide you in choosing the best 529 plan to suit your needs.