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College tuition costs, like most things, are rising. You’re probably familiar with some of the tax-deferred options that are available to help alleviate some of the financial burden of higher education, like the 529 plan. A 529 plan lets you invest money for your child’s education without having to pay taxes on the growth of the investment. But here are a few things you might not know about these plans:
- Each state offers 529 plans, but plans differ widely from state to state. States select the fund companies in which you can invest. You’re not limited to plans in your own state—you can select a 529 from any state.
- Most states offer tax incentives for potential buyers to invest in their own state’s plan. In some cases, these incentives might not outweigh the benefits of choosing another state’s plan. Use the calculator at vanguard.com under College to calculate your potential tax break.
- Most states charge annual fees on 529 plan assets. Some states charge a reasonable fee of 0.3 to 0.05%; others charge fees as high as 3% (that’s nearly 10 times as much as some of the lower fees). Shop around. Compare state fees at savingforcollege.com. When you evaluate state plans, consider fees and incentives together. Some states only offer 529 plans through a broker or other financial planner. Avoid these types of plans altogether. Commissions to brokers can cost you up to 6% of your initial investment. Also, broker-only plans have recently registered higher losses.
- Participants don’t have control over the investment options within a 529 fund, so you’ll need to consider the investment strategy of a particular plan before you enroll. Investment strategies vary significantly from state to state. Some plans invest heavily in stocks for the life of the investment. Thus, these plans may be unable to recover any short-term losses that are incurred in the years just before college. Look for a plan that is age-based, where the balance of the portfolio shifts from stocks to lower risk investment options, such as bonds, as your child ages and as the plan nears maturity. This ensures that you’ll have more money available to use when you need it.
A 529 fund generally should be part of your college savings plan. When you’re shopping for a plan, weigh all of these factors together before enrolling. Selecting the right plan for your family can make a huge difference.