5 reasons to invest in a 529 plan now

http://www.savingforcollege.com/articles/20100430-5-reasons-to-invest-in-a-529-plan-now

If you've put off saving for college because of other financial pressures, worries over the recession or skepticism about the investment paying off, it's time to reconsider.

Some people didn't save for college in the first part of this decade because they were overleveraged, says Peter Mazareas, chairman of the Washington, D.C.-based College Savings Foundation. But the recession has caused some to start saving for the future just as college costs are rising at a staggering rate.

"We anticipate there will be a high percentage of people saving," he says.

Mazareas and other experts identified five reasons you should join the savers and invest in a 529 right now.

1. The options have increased

   Saving for college isn't just for those who can withstand taking risks in investing. There also are choices for the investor who avoids risk, Mazareas says.

   Broadened investment choices in many plans allow those who think of themselves as a conservative, moderate or aggressive investor to find an option, even in an age-based portfolio.

   "It's intended to appeal to even more investors by offering choices that investors may want that they didn't find in 529s before," says Joe Hurley, a CPA and founder of Savingforcollege.com. One downside is that with more options, there's more confusion for some investors, he says.

   Fred Amrein, a financial planner with Amrein Financial in Wynnewood, Pa., says investors need to take a proactive approach and be aware of their investment options and risk tolerance. "Just don't put it on auto pilot," he says.

2. The fees have decreased

   Fueled by increasing competition among the plans for investors, fees are coming down across the board, Hurley says. Some 529 plans had higher fee structures when they were just taking off and the fees were needed for everything from mailing account statements to paying mutual fund managers, says Kathy Kristof, a syndicated personal finance columnist and author of "Investing 101."

   "As the plans have grown -- and they've grown exponentially -- a lot of those fees have been wrung out of the system by state treasurers," she says. "A whole bunch of (investors) are getting better deals." She says the fee structure is the first thing she advises people to consider when comparing plans.

3. The plans offer major tax advantages

   The tax savings from investing in 529 plans are often touted as a major benefit, and rightly so. "The 529 plan gives (families) the ability to build earnings on a tax-free basis. That's kind of the no-brainer reason," says Deborah Fox, founder of San Diego-based Fox College Funding.

   It could be even more important if your state offers a tax deduction for your 529 plan contributions. Most have Dec. 31 as their contribution deadline to claim it on that year's state return.

   A 529 plan is a great avenue for tax-free investment growth, Amrein says. And with expected increases in tax rates in 2011 and 2012, 529 plans stand to become even more popular as people look for ways to cut their tax bill.

   Further, the Bush tax cuts scheduled to expire at the end of this year and new taxes that came with health care reform give families more reason to invest in a 529 plan, Hurley says. That's especially true for those in high-income tax brackets.

4. They do what they're supposed to do

   The 529 investments haven't taken any more of a beating than any other investment in the past two years, say Kristof.

   "I think they performed exactly the way they were promised to, which is an important thing to keep in mind," she says. "They didn't say they weren't going to lose money. They basically said they were going to mitigate your losses by being diversified. The ones I've invested in have done exactly that."

   The plans take the money out of your hands and encourage you to invest regularly rather than use the money on a sale at Nordstrom. "That's the biggest benefit I see," she says. It helps people not to mess themselves up."

5. The plan could match your contribution

   More states are offering matching 529 plan contributions to low- and middle-income families, Hurley says. Generally, families have to apply for the match through a separate application process, and the funds don't become available until the student goes to college. But it could provide a boost to an investment, whether your child is nearing his freshman year of college or just starting preschool.

Posted April 30, 2010