How to Choose a 529 College Savings Plan
By Joe Messinger, CFP®
May 26, 2023
If you are a regular reader of Capstone Wealth Partners’ blog, you know the price of college is soaring to record levels. To make this massive purchase (and make no mistake, college is a purchase!), families are trying to save more before their child enrolls.
One of the most popular and efficient ways to save for the cost of college is by using a 529 savings plan. Unfortunately, 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 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 tax code changes implemented in 2018, 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! Let’s dive into how you can find the right plan for you.
There are many 529 Plan 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 their home state offers.
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 its 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 of residence.
Having multiple plans from different states may be a good idea depending on your family’s situation. Every plan is different, and families must make careful choices. 529 plans have different investment portfolios that may perform better than others.
Program options 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 greatly impact how quickly your account may grow.
More to consider.
How can you get 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.
Tips From The CWP Team: Go Fee Only
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 client’s needs ahead of anyone else’s. 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. Oftentimes, 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 the 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 limits an advisor’s ability to manage a 529 during the year.
So, it is a dilemma. Families with college-bound children should include a 529 plan in their 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 Wealth Partners 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
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