Monday, March 23, 2009

Saving for college

This question came from @creditgoddess on Twitter. Are you following us on Twitter? We give out a financial tip every day and respond to questions. @family_finances

Q: Investing in 529 plan, but not happy with the results. Because of the current economy, should I put it somewhere else?

A: It sounds like this is a performance issue, not really related to the account type. A 529 Plan allows tax-free growth for educational purposes. Some states offer a tax deduction for contributions, and many parents and grandparent use 529 accounts to help build funds for future education. Generally, withdrawals used to pay college, vocational, or professional schools, or related expenses (including housing and books) are free of state or federal income taxes. Though many plans are administered by state governments, students can use the money for schools anywhere.

Originally, these plans had to be offered through a state government, and each state established the investment options and fee structure. States negotiated separately with fund and investment professionals, so some plans are better than others. Some states offer more and better investment choices. Similarly, some states offer better tax incentives to contribute. Basically, each person should review the plan where they live, and see if the incentives and investment options are strong. If not, they can choose a differing state (although non-residents wouldn't enjoy a state tax benefit). Also, regulations have changed to allow mutual fund and other companies to offer 529 plans. Be wary of plans offered through brokers or banks, though, because they feature expensive sales commissions that you can avoid by buying directly through a state.

With those background explanations, no one recently has been thrilled with any investment performance. Stock funds are down by half in the past few years, and bond or money market funds pay ridiculously low interest. It really hasn't mattered if we're talking 529 plans, or IRAs, or 401(k)s, or general brokerage accounts. This is just a very tough time for investing, and the type of account likely doesn't matter very much.

My 529 plan review would start with the plan offered through the state where I live. I'd carefully review the plan fees and investment options. If satisfactory, that's where I'd invest. If not, I'd compare nearby states using these same criteria. Internet sites and personal finance magazines offer comparative 529 plan data. Last, I wouldn't abandon a good plan just because investment returns are bad - virtually everything is bad right now. There will be better days coming, and good plans, like any good investments, will prosper again. That's your best bet for funding future education costs. Good luck.

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