What is the best 529 plan for me?
Lyman provides a good summary of what to look for in a 529 plan. Some additional thoughts:
1. If the beneficiary of the plan you set up elects not to attend college you can move those funds to another person in the same generation.
2. You can move 529 funds from one state to another once per year.
3. There are international institutions which are qualified institutions for 529 tax benefits
4. Use the direct sold programs and a reliable name like Vanguard works well.
5. Sometimes 529 plans, because of their lack of flexibility, are not the best way to save for future educational expenses. I often use zero coupon or coupon bearing CA municipal bonds where the interest is double tax free and the parents control the funds and as well the future use of the funds. Stuff happens so flexibility is important to consider.
6. Another good alternative offering many of the same advantage of municipal bonds are Roth IRA accounts and contributions assuming you are eligible to contribute. Any principal contribution that are non-conversion Roth's can be used anytime for any purpose. This is not true for Roth conversion funds.
7. An excellent website I recommend is www.finaid.org to answer all questions in regard to funding educational expenses.
With the cost of college continuing to soar, many parents worry a great deal about how to afford it. A 529 plan is a great start for most parents and even grandparents. Some things to consider are:
· Start saving early.
· Consult your tax accountant to see if your specific state offers a state tax deduction.
· Compare the fees associated with different plans. Since saving for college tends to be a long-term investment, fees can make a big difference over long time horizons.
· Choose a plan that offers a wide range of investment options.
If your state offers a tax benefit, is usually best to find a plan from your state. Not all states require you to use their plan. You can easily find specific state tax benefits here:
If your state does not offer a tax benefit, look for low cost funds and good fund choices. Vanguard is a good option here.
I would suggest the one with the lowest cost. Consider using ones that have index funds since these accounts typically have a limited choice of funds so if an active manager does not perform well you may not have many choices to replace them with from within the limited stable of choices. Expenses therefore become the most important element in the decision process. You may also want to see if the 529 plan within the state you reside has some special advantages for you. For example in NY you can get a state income tax dedcution for your contributions to NY's plan. That is a significant benefit.
I agree with Stephen, expenses should be viewed as your worst enemy.
I'd further explain three factors in choosing a plan:
- No matter what type of savings plan, it is good to understand your investment options. A 529 plan should offer a variety of investment asset classes including both domestic & foreign choices as well as short and intermediate "high quality" bond fund options. Further, the plan should also offer a safe cash option preferably FDIC insured. A safe cash option will make sense once you've accumulated the amount needed to pay for your child's education. Overall, the plan you select should ultimately reflect your own personal investment philosophy so you can best understand the risks and stick with the program through good and bad markets.
The lower the costs, the less returns will be reduced by fees. An example of a low fee is 0.25 percent per year. 1.00 percent per year is high.
- Both federal and state tax benefits should be considered. But choosing your own state’s plan should not be your immediate default. Research and compare the tax benefits of various plans and have your CPA, if needed, help you determine how much tax benefit you'd receive for staying within your own state's plan or going elsewhere. You may be surprised that the income tax deduction isn't worth staying in state (that is assuming your state allows for a deduction).
Here are a few basic questions that can help you find a good plan:
- Are the plan's expenses reasonable?
- How are the plan's funds allocated?
- What flexibility do you have in building a portfolio with the available funds or in selecting an age-based allocation?
- If you do select your own state's plan, what happens if you were to move out of your current state?
Good luck with your search.
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