Choosing your 529 wisely
Covering your kids’ college tuition is an admirable goal, but before you start socking money away, you might want to take a crash course in the dizzying array of education savings vehicles.
Among the most popular are those known as 529 plans, but shopping for them is no simple task. The plan or plans offered in your state might have tax savings, but do the math carefully: Depending on the fees and investment options, you might find a better deal somewhere else.
In general, it makes sense to start shopping close to home, because you could get a state tax break on your contributions. All 529 plans qualify for federal tax breaks, though how well you’ll do depends on your bracket, and how much you contribute. Look over your home state plan carefully before committing to it. Lofty fees and less-than-stellar fund management can easily eclipse any tax savings.
Whatever 529 plan you choose will only be as good as the fund shop that administers it. And while you may lose some state tax incentives by shopping around, you could gain a lot in terms of performance with a solid plan administered by a low-cost provider. Because these investments are held for many years, expenses can really add up over time.
For do-it-yourselfers, there are excellent direct-sold plans, such as those managed by T. Rowe Price in Alaska and the Vanguard Group in Utah, O’Boyle said. For investors who prefer going through a broker, one of the better options is the plan administered by American Funds in Virginia.
As with any investment, it pays for the buyer to beware. Last month, Ameriprise Financial Inc., a brokerage and insurance unit recently spun off from American Express, was fined by regulators for not properly supervising the sales of its 529 education plans. Ameriprise was also ordered to compensate more than 500 customers whose accounts were hurt in the case.
If your financial adviser or broker is shepherding you into a specific plan, find out why. If you’re being encouraged to purchase an out-of-state plan, ask if you’ll lose out on tax breaks. If you will, figure out whether it’s worth the loss.
Once you’ve found a 529 plan you’re comfortable with, you’ll need to figure out what investments you should hold. You’ll want a mix of assets appropriate for your time horizon, and you should be prepared to adjust it to a more conservative allocation over time. A portfolio that’s being saved for an 11-month-old should look very different from one meant for a 13-year-old.
Online calculators can help you decide how much to save. A free calculator on T. Rowe Price’s Web site can help you figure out the average cost of public school versus private school, depending on how many children you have. This should not be viewed as all-or-nothing scenario, said Stuart Ritter, a certified financial planner with T. Rowe. The idea is to help your child pay for college, not necessarily to fund the entire endeavor. It’s also important to remember, as you juggle this with your other financial obligations, that there are no scholarships or financial aid for retirees.
“Figure out a general ball park of what you’ll need, then knowing that number, decide, balancing it with retirement, how much you can commit, knowing there will be other options for your kid when they go to school,” Ritter said. “Don’t get so overwhelmed by the decisions you have to make that you don’t make any.”