College Savers Spurn 529 Plans

June 10, 2009
Special Feature

College finance advisors find it surprising that only a third of the families who are saving for college are using a 529 plan.

A 529 college-savings plan lets parents contribute after-tax dollars and allow the funds to grow until they’re needed to pay college costs. Then, as long as the money is used for higher-education expenses, any withdrawals are tax-free. Given those advantages, college finance advisors find it surprising that, according to a recent Gallup poll, only a third of the families who are saving for college are using a 529 plan.

About 60% of those putting away money to pay for college are investing in low-risk investments like savings accounts, CDs, and money-market funds. Many 529 plans have the same options, according to college finance consultants, and they come with tax breaks that ordinary investments don’t have. In addition to the federal tax break on withdrawals, for example, many states give state-tax deductions to residents who put money into that state’s 529 plan. Currently, 34 states and the District of Columbia offer such incentives.

Not all 529 plans are equal, however. Some come with shockingly high fees and others may have limited investment options. It pays to do research, not only on your own state’s 529 plan, but also other state plans that may be open to out-of-state investors. A good place to start is at Savingforcollege.com, which rates and compares 529 plans. Lastly, don’t pay a broker to put you into a 529 plan. With a minimal amount of legwork, you can find the right 529 plan yourself and save the up-front commission, which will eat into your yield.