The Scoop on 529 College Savings Plans

September 2, 2009
Michael Sheehan

529 college saving plans are attractive investment options, but fact-finding is recommended as plans vary between the District of Columbia and 48 states that offer them.

To many parents, saving for their children’s college education is a daunting prospect. A 529 college saving plan, which allows investments to grow tax-free and can be withdrawn tax-free to pay for qualified higher education expenses, has become a popular option. Although 48 states and the District of Columbia offer 529 plans, however, they’re not all the same. It can pay to do some fact-finding before you choose which plan to invest in.

The first plan to look at is at the one offered by your state. Thirty states offer parents a tax break when they contribute to an in-state plan. How valuable that tax break is, however, depends on your state’s tax rates and the tax bracket you’re in. In some cases, the benefit won’t outweigh other factors like plan expenses, which can run as high as 3%. Broker commissions are another issue to consider. Many states offer plans that are sold through brokers and, in a few states, that may be your only choice. Commissions will put you in the hole by 1% to 6%, so it makes more sense to choose a plan that’s sold directly. If your state doesn’t have one, take a look at state plans that are open to everyone no matter where they live.

You should also think about the investment options a 529 plan offers. Many college financial planners favor an age-based portfolio that shifts assets to more conservative investments as your child gets older. Most states have plans that offer this option, but some do not. Tip: Doing the research may sound like a big job but there are a couple of Web sites that can help. Check out the College Savings Plan Network or savingforcollege.com.