Section 529 college savings plans are the best Estate Planning strategy for most people to save and pay for the education of a child or grandchild. But which plan should you use? The number of plans available has exploded. Most states (34) allow residents of any state to invest in their plans, and they allow distributions to be spent at colleges in any state. A number of these states have options within their plans, giving more than 34 choices.
A big change is that brokers, as well as financial and estate planning specialists now are marketing the plans. Wisconsin allows out-of-state residents to invest in its plan only through American Express Advisors. The brokers get various fees and commissions, which reduce your return. But the broker-sold variations usually have more investment options, and you get the advice of the person selling the plan.
Mutual fund companies and discount brokers are promoting directly the plans in which they participate. If you favor a particular fund company or discount broker, you can get information on the plans in which it participates by calling the firm or checking its web site.
We’ve reviewed the benefits of 529 plans in detail in past visits. Maximum lifetime contributions can be $100,000 or more. You can make tax-free gifts to the account of up to $50,000 in one year. The investment returns of the account compound tax-deferred, and distributions that pay for qualified education expenses are tax free. The person contributing to the account is the owner and can change the beneficiary, transfer the account to another plan, and even get the money back.
But the state plans don’t offer equal benefits or charge equal expenses. Comparing these plans is not easy, because states are not subject to the disclosure laws that private financial firms have to follow. The states offer brochures that often don’t give all the details and sometimes have out-of-date information. Before choosing a plan, ask for a detailed prospectus with all the details.
Here’s what to look for when evaluating a plan.
529 Plan Estate Planning Considerations #1
At least nineteen states allow their residents tax deductions for contributions to the state’s plans, but not for contributions to other states. More are considering adding deductions. Deductions aren’t allowed on the federal income tax return or the return of another state. Deductions can be generous. Missouri allows a married couple a $16,000 annual deduction. Colorado’s deduction is unlimited.Determine the tax deductions for your state’s plan. Also, ensure that your state allows investment returns to compound tax-deferred and that distributions are tax free. If your state’s plan has these tax benefits, it usually makes sense to contribute the maximum deductible amount.
529 Plan Estate Planning Considerations #2
Fees and expenses vary considerably, even when the same firm is managing the accounts of different states. For example, you can invest with TIAA-CREF and pay 0.65% of assets in New York’s plan, 0.81% in Connecticut, and 0.95% in Tennessee. The differences exist because many states add to the expenses to cover their costs or even make a profit. Added yearly fees are 0.25% to 1.29% of the account value. The state also might charge an enrollment fee, ranging from $5 to $85.Some plans have fees so high that their plans aren’t worth considering. Arkansas charges up to 1.76% of assets, and the expense ratio is difficult to uncover from the literature. With no tax deduction for residents and only five investment options from Merrill Lynch, Arkansas’s plan is not attractive, even to its residents.
529 Plan Estate Planning Considerations #3
The investment options range from as many as 10 in Alaska to one in a handful of states. But the one option might be a balanced account. No state gives you the kind of control you’re used to in either IRAs or 401(k)s. Most states use outside money management firms, but in a few only funds managed by the state treasurer’s office or CDs from the College Savings Bank are offered.Most plans offer “age-based” portfolios. These have a mix of stocks and bonds in which the percentage of stocks is reduced as the student gets nearer to 18. Virginia has age-based accounts but lets you designate the student’s age at the start. Some offer fixed allocation balanced funds. Only a few states offer 100% equity funds.
Your ability to change investment options after the initial choice is limited. Often you have to transfer your account to another state’s plan to change the investments.
529 Plan Estate Planning Considerations #4
The tax law lets you change the beneficiary of the plan, transfer the account to another owner, and even withdraw your money. The owner and the beneficiary can be the same person. You can roll over the account tax free from one state plan to another. But not every state gives you all these options. Decide the options you want and be sure any state plan you consider has them.
529 Plan Estate Planning Considerations #5
Some states tack all kinds of restrictions on their plans. You might not be able to contribute if the student is above a certain age. The account might have to be spent by the time the beneficiary reaches a certain age, such as 30. Some don’t allow withdrawals until money has been in the account for at least a year. The restrictions are as unlimited as the imaginations of the people designing the plans.
You can have accounts in multiple states. Use your own state’s plan if it is reasonable and offers tax deductions. Once you’ve contributed the maximum deductible amount to your state’s plan, look for attractive plans from other states.
The best way to compare plans is with the web site www.savingforcollege.com. It has a “compare function” that lets you select features that matter most to you. Then the site compiles a table showing the details of the plans that fit your parameters. To get details of individual state plans, call 877-277-6496 or go to www.collegesaving.org. I’ve also put a table on our web site that lists the key features of most state plans. Click here.
Two very popular plans are combined in a couple of new programs. These programs let you use credit card rebates to fund section 529 college savings plans.
Upromise, Inc. will place rebates into college savings accounts when purchases are made through participating retailers. Rebates range from 0.5% to 12% of the purchase price. Participating retailers include General Motors, Exxon Mobil, AT&T, 11 other large companies, 30 Internet retailers, and 7,000 restaurants. The rebates are placed in college savings plan accounts managed by Fidelity (New Hampshire, Massachusetts, and Delaware plans) or Salomon Smith Barney (Colorado plan). You can register up to 10 credit cards with the account and get rebates on qualified purchases. Check out www.upromise.com.
BabyMint promises rebates of 2% to 24% when purchases are made at over 150 retailers, including L.L. Bean, Dell, Amazon.com, Lands’ End, and Sharper Image. But only Internet purchases count, and you have to access the retailer’s site through BabyMint’s portal before making the purchase. You also can print coupons that are good for additional credits at retail stores. BabyMint is planning to announce offline retailers who participate in the program. BabyMint can make direct deposits into the Ohio and Rhode Island 529 plans or send you a check for your rebates. Sign up at www.babymint.com.
Each site requires you to sign up using one or more credit cards. Multiple individuals can sign up on one account, allowing an entire family to get rebates on many of its purchases for the 529 account for one student.