| 3 Things You Need To Know About 529s | |||||||
Sure, a 529 college savings plan can be a great way to save for your child’s education-they allow you to invest in a tax-deferred account for tuition costs (lifetime limits vary by state, but are typically $200,000 or more). How can you maximize the savings in your child’s 529 plan? Don’t miss these key strategies that are often overlooked, from Mark Kantrowitz, founder of financial aid resource FinAid.com. By Darrell Kirton Don’t focus too much on the tax deduction. Many states’ 529 plans offer full or partial state income-tax deductions for its residents, which can make investing in your home-state plan look like a no-brainer (contributions to other states’ plans are generally not deductible). But if you start saving when your child is young, you should really focus more on finding a good plan with low fees, says Kantrowitz. Why? 529 fees are charged every year, based in large part on the presumably growing balance of your account. “So if you open a plan for a newborn,” he explains, “you’ll have 17 years of fees ahead of you.” And that may very well outweigh the benefit of state income-tax deductions. His advice: Don’t automatically give tax deductions a lot of weight when choosing a plan, especially if college is a ways away. If, however, you’re starting to save when Junior is closer to college—and you have fewer years of 529 fees ahead of you—then the tax deduction matters more. Look closely at what you’re paying for advice. There are two types of 529 plans: Advisor-sold ones, which offer access to a financial professional who can give college planning and other money advice, and direct-sold ones, which require you to do the legwork of researching plans, coordinating college savings with your other financial goals, etc. “A lot of families will use an advisor-sold 529 plan instead of a direct-sold 529,” says Kantrowitz. “But what parents may not realize is that the fees incurred by advisor-sold plans are high—potentially high enough to counter a substantial portion of earnings or tax savings coming their way.” Annual management fees of as much as 2% and sales charges of as much as 5.75% of your contributions can really eat away at your 529’s growth. Direct-sold 529s, many of which invest in index funds with low expense ratios, incur lower expenses, which may leave more money in your pocket. “No matter what type of plan you choose,” says Kantrowitz, “look for one that charges less than a 1% fee.” Take full advantage of free money for college. You may already be making automatic contributions into a 529, but did you know that you can add to it just by participating in a loyalty rebate program, such as Upromise. Log on, input your credit card information, and when you purchase goods from a participating vendor with that card, you get a college savings rebate. You can sign up as many cards as you want, and your family and friends can link their cards to your child’s account as well. “Sign up and forget about it,” says Kantrowitz. “The money automatically goes into your 529. It’s effectively free money, so why not take advantage?” Darrell Kirton been writing and editing personal finance publications for nearly 20 years, and is a father of two. |
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