How to Choose a 529 College Savings Plan
By Joe Messinger, CFP®
February 19, 2020
If you are a regular reader of Capstone’s college blog (or simply living and breathing), you know the price of college is soaring to record levels. To make this massive purchase, families are trying to save more and using 529 savings plans to do it. Although shockingly, only a third of families know what a 529 plan is.
What is a 529 plan and why is it so popular?
A 529 Plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. It is named after Section 529 of the Internal Revenue Code which created these types of savings plans in 1996. Funds invested in a 529 plan grow tax deferred and can then be accessed tax free as long as the funds are used for higher education at any accredited institution anywhere in the world. In addition, with the 2018 changes to the tax code, families can use 529 plans to finance K-12 private education. The focus of this post is how to find the right 529 for your family. If you want more information on how the 529 works check out this post 11 secrets of 529 College Savings Plans.
If your family is considering opening a 529 plan that is fantastic! What do you do now?
Lots of options
Families can buy a state sponsored 529 plan from ANY state in the US. Many families do not realize this fact. They think they are restricted to buying the state plan offered by their home state.
Sometimes, buying from your state plan is a good idea. Some states provide a tax deduction to residents who invest in that state’s 529 college savings plan. Ohio recently increased their available deduction from $2,000 to $4,000 per year. You need to consider if the deduction will have a higher value than the potential earnings in a plan outside your state
Depending on your family’s situation, having multiple plans from different states may be a good idea. Every plan is different, and families must make careful choices. 529 plans have different investment portfolios that may perform better than others. Program options to choose from range from risk based asset allocations, age-based plans, and even those with a fixed earning. Customer service may vary widely. Also, the service fees for things like enrollment, maintenance, and management of the account can vary and make a big impact on how quickly your account may grow.
More to consider
Savingforcollege.com is a great resource to compare 529 plans. But maybe this sounds like more variables than you anticipated? How can you get personal advice on the best plan for your family if you have more questions?
Financial brokers can sell “advisor-sold” or “broker-sold” 529 plans. (FYI When you select and invest in a 529 plan on your own—DIY style–those are called “direct-sold” plans.) However, brokers expect to be paid for their services and advice, and their commissions will impact your overall investment.
Did you read our piece on the different types of financial advisors? If you did, you know that Capstone Wealth Partners is an independent fee only Registered Investment Advisor (RIA) and a fiduciary. Simply put, the fiduciary responsibility puts the needs of the client ahead of the needs of anyone else. Not all advisors are held to the fiduciary standard.
RIAs are struggling to find a way to serve their families with 529 plans. Fee only RIAs cannot sell “broker-sold” plans as they do not accept commissions. Often times, direct-sold plans will not deal with an advisor without a Power of Attorney.
Part of the power of having a financial advisor is having their ability to understand the market forces at work and move your money around to make it work for you. With 529 plans, the money is invested in various funds; however, you can only move your money twice during any one year. This restriction severally limits what an advisor can do to manage a 529 during the year.
So, it is a dilemma. Families with college-bound children NEED to include a 529 plan in their overall financial plan. However, in many cases advisors are somewhat restricted on what they can do to help.
Paying for college is the number one concern of most families today. Advisors like Capstone know the importance of this piece of the financial puzzle and help our families make the best choices for their needs.
Our general recommendation for the 529 College Savings Plan is to thoroughly research the plan that is right for you particularly if your state offers a state tax deduction. Then select the age-based portfolio option in the direct sold plan that invests in low cost mutual funds and avoids commissions. These plans are built to automatically adjust your mix of stocks and bonds to be more conservative as college gets closer.
Originally published 5/2018
May 29, 2020