529 Plans are Losing Enthusiasm Again: Time to Shop Around, Get Advice and Compare Because They’re Still a Good Deal

While college savers have been placing more assets in 529 college plans since the start of 2009, Boston-based Financial Research Corp. reported that as of the second quarter, 2010, 529 plan assets were down 5 percent. During the second quarter, investors placed $1.9 billion into 529 college savings plans, down from $3 billion during the first quarter.



Yet if investors are skittish about their 529 investments, most experts believe that 529 plans are still one of the best ways to save for college. If anything, it might be a good time to review your 529 investments and make sure your student’s future college funds are in the right place.


A financial planning professional is a good first stop to review your entire college savings strategy, which could be for your child or for yourself. Here’s some basic information on 529 plans and some guidelines on what you should be doing with these dollars now:


Start with a definition: 529 college savings plans – named for the part of the federal tax code that created them in 1996 – allow a parent to open a tax-deferred college savings plan with as little as $25 to start in some states. Any withdrawals are completely tax-free if used to pay for a beneficiary's college tuition, fees, books, supplies, and — for students enrolled at least half time — room and board. Investors are allowed to roll over funds from one state's 529 plan to another state's plan once every 12 months, though it’s possible to transfer funds to another 529 plan at any time if the beneficiary is changed. That means if one kid gets a huge scholarship, his 529 assets can be transferred to a sibling or you if you’re headed back to school.


Start with your goals: SavingforCollege.com has a series of online calculators to help investors determine how much they should put away for the portion of college costs they’re expected to provide out-of-pocket. The typical goal these days if 50 percent. It’s also important to consider time horizon and re-evaluate the performance of funds every year. 529 plans also use target funds – funds tied to the date your student will need the money – so you need to evaluate the providers of the funds and their records.

Changes in 2010: A qualified, nontaxable distribution from a 529 plan this year can be used to cover the cost of computers, peripherals and Internet access. The technology, equipment or services qualify if they are used by the beneficiary of the plan and the beneficiary's family during any of the years the beneficiary is enrolled at an eligible educational institution.

It’s still a good estate strategy: The IRS allows for an accelerated gift option that allows individuals to average gifts over contribute up to five times the annual gift tax exclusion amount ($13,000 per beneficiary, or $26,000 for married couples if they file a gift tax return to show gift splitting) over a five-year period without incurring federal gift tax. So an individual can contribute up to $65,000 per beneficiary in one year and a married couple up to $130,000 per beneficiary without incurring gift tax. (If you give the full amount, you will not be able to give any gifts to the same individual during the five-year period without incurring gift tax or using up a part of your lifetime exclusion.) That’s good news for grandparents or another close relative looking for a way to reduce the value of their estate right away with a larger gift.

What should you ask when evaluating a plan? Here are some basic questions to ask when you’re considering an initial investment or reviewing the investment you have:

Have there been particular criticisms of your state’s plan for any reason? Get on the Internet and start reading.

How is the plan’s money invested? What’s the available diversification?

How has the plan done since inception?

What are the plan’s fees and expenses, and how do their fees compare to the plans of other states you might be considering? Read closely for sales commission information.

Is there a state tax deduction or credit available?

Have plan managers changed over the history of the plan? How many times?


October 2010 — This column is provided by the Financial Planning Association® (FPA®) of Puget Sound, the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning. FPA is the community that fosters the value of financial planning and advances the financial planning profession and its members demonstrate and support a professional commitment to education and a client-centered financial planning process. Please credit FPA of Puget Sound if you use this column in whole or in part.

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