COLLEGE SAVINGS 101

Savingforcollege.com

Intro To College Savings - Lesson 3
http://www.savingforcollege.com/articles/intro-to-college-savings-lesson-3

Posted: 2015-08-13

Shop for a plan

Lesson 2 discussed the various investment vehicles you can use to save for college, including 529 college savings plans, 529 prepaid tuition plans, Coverdell education savings accounts, U.S. savings bonds, and fully taxable investment accounts.

Assuming you have decided to invest with a 529 college savings plan, the next step is to choose the 529 college savings plan you wish to use.

In-state versus out-of-state 529 plan

Your choices consist of the 529 college savings plan offered by your own state (only the states of Wyoming and Washington have no 529 savings plans) along with the 529 college savings plans offered by the more than three dozen states that welcome non-residents into their plans. It is important to realize that you are not forced to stick with your own state’s plan, and that your selection will in most cases have no impact on where your child attends college.

Statistics reveal that most parents decide to use their own state’s 529 plan—and with good reason. After all, no state is more interested in your family’s education than your own state.

In addition, most states attach special benefits to their 529 plans as an incentive for residents to use the in-state plan. Here are some examples of what your state may possibly be offering:

  • A state income tax deduction or credit for contributions to the home-state 529 plan.
  • Matching contributions from the state designed to assist and encourage low- and middle-income families to save for college using the state’s 529 plan.
  • A reduction or waiver of program fees and expenses.
  • Special creditor protections as defined under state law.
  • The ability to “lock-in” resident tuition rates at the state’s public universities even if the child moves to another state.

Be sure to look for any such benefits within your own state by using Savingforcollege.com’s 529 Plan Comparison Tool. All details and eligibility requirements will be detailed in the 529 plan’s official program disclosure statement (PDS), which you should carefully read.

Once you understand what your state has to offer, feel free to shop among other states’ plans, realizing that you may be giving up some state-level benefits by investing your college-savings dollars elsewhere.

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Here are some of the key factors to consider when comparing different plans:

  1. Investment quality. Look at the investment options offered by the 529 plan. Most plans offer two categories of options:
    1. “Static” options are portfolios that invest in a blend of funds to achieve a specific target mix of stocks, bonds, etc. that stays fixed, and those that have only one underlying mutual fund.
    2. “Age-based” options are portfolios that automatically shift to a more conservative mix of stocks, bonds, and money market funds as your child gets older and closer to college age.

    Remember: even if the plan offers 20 investment options, you will probably be using just one of those options. Identify the option that best meets your own investment objectives. Then study the underlying investments used for that particular investment portfolio. Are you comfortable with the investment managers (i.e. fund companies) for the underlying securities? Is the portfolio properly diversified? Has it performed well? You can research the investment details, including past performance, in the plan’s official disclosure statement and on its website.

  2. Costs. 529 plans will have different expense ratios due to differences in (1) the underlying securities within their investment portfolios and (2) the fees charged against the plan for program management and administration.

    Over the years, expense ratios have dropped dramatically in most 529 college savings plans. Many states have turned to indexed mutual funds and exchange-traded funds that offer lower costs than “actively-managed” funds. In addition, states have pared their management and administrative fees as their plans grew larger and the 529 marketplace became more competitive.

    Still, the state you live in may not be as price-competitive as most. Once you decide which type of investment portfolio you want, check similar options in other states’ plans to determine how their costs compare.

    Another cost item to consider is the annual account maintenance fee charged by some 529 plans. Although the amount may not seem like a lot—typically $25 or less each year—many states have eliminated their account maintenance fees, or at least waive the fee for state residents.

  3. Flexibility. Some 529 plans have rules that are more restrictive than what the federal government requires in its tax regulations. For example, there may be rules that limit your options when withdrawing funds from your 529 plan; or that prevent you from transferring ownership of your account to someone else; or that make it more difficult than necessary to roll over your account to another 529 plan. Carefully read the official program disclosure statement for the 529 plan you intend to use prior to opening your account.
  4. Program strength. When it comes to choosing a 529 plan, millions of American families have “voted with their dollars.” If a 529 plan has attracted a lot of contributions, there are probably good reasons. A 529 plan that has been in place for several years, but has not been successful in attracting new accounts, may not have the ability to reduce costs or expand its investment lineup without undergoing major changes, such as the replacement of its program manager.

Using multiple 529 plans.

You are not restricted to using just one 529 plan. Some parents feel it makes sense to use multiple plans for the same beneficiary. The most common scenario is when a family wishes to take maximum advantage of an in-state tax benefit by using the in-state 529 plan. Since most states cap the amount of the benefit, the family may have additional dollars that they place in a different state’s 529 plan that has more attractive investment, cost, or flexibility features. Rarely will it make sense to open accounts in more than two different 529 plans.

Coming up:

Lesson 4: Get family and friends involved

Lesson 5: How will my savings affect financial aid?

Previously sent:

Lesson 1: How much to save

Lesson 2: Compare your options

Shop for a plan

Lesson 2 discussed the various investment vehicles you can use to save for college, including 529 college savings plans, 529 prepaid tuition plans, Coverdell education savings accounts, U.S. savings bonds, and fully taxable investment accounts.

Assuming you have decided to invest with a 529 college savings plan, the next step is to choose the 529 college savings plan you wish to use.

In-state versus out-of-state 529 plan

Your choices consist of the 529 college savings plan offered by your own state (only the states of Wyoming and Washington have no 529 savings plans) along with the 529 college savings plans offered by the more than three dozen states that welcome non-residents into their plans. It is important to realize that you are not forced to stick with your own state’s plan, and that your selection will in most cases have no impact on where your child attends college.

Statistics reveal that most parents decide to use their own state’s 529 plan—and with good reason. After all, no state is more interested in your family’s education than your own state.

In addition, most states attach special benefits to their 529 plans as an incentive for residents to use the in-state plan. Here are some examples of what your state may possibly be offering:

  • A state income tax deduction or credit for contributions to the home-state 529 plan.
  • Matching contributions from the state designed to assist and encourage low- and middle-income families to save for college using the state’s 529 plan.
  • A reduction or waiver of program fees and expenses.
  • Special creditor protections as defined under state law.
  • The ability to “lock-in” resident tuition rates at the state’s public universities even if the child moves to another state.

Be sure to look for any such benefits within your own state by using Savingforcollege.com’s 529 Plan Comparison Tool. All details and eligibility requirements will be detailed in the 529 plan’s official program disclosure statement (PDS), which you should carefully read.

Once you understand what your state has to offer, feel free to shop among other states’ plans, realizing that you may be giving up some state-level benefits by investing your college-savings dollars elsewhere.

{page_break}

Here are some of the key factors to consider when comparing different plans:

  1. Investment quality. Look at the investment options offered by the 529 plan. Most plans offer two categories of options:
    1. “Static” options are portfolios that invest in a blend of funds to achieve a specific target mix of stocks, bonds, etc. that stays fixed, and those that have only one underlying mutual fund.
    2. “Age-based” options are portfolios that automatically shift to a more conservative mix of stocks, bonds, and money market funds as your child gets older and closer to college age.

    Remember: even if the plan offers 20 investment options, you will probably be using just one of those options. Identify the option that best meets your own investment objectives. Then study the underlying investments used for that particular investment portfolio. Are you comfortable with the investment managers (i.e. fund companies) for the underlying securities? Is the portfolio properly diversified? Has it performed well? You can research the investment details, including past performance, in the plan’s official disclosure statement and on its website.

  2. Costs. 529 plans will have different expense ratios due to differences in (1) the underlying securities within their investment portfolios and (2) the fees charged against the plan for program management and administration.

    Over the years, expense ratios have dropped dramatically in most 529 college savings plans. Many states have turned to indexed mutual funds and exchange-traded funds that offer lower costs than “actively-managed” funds. In addition, states have pared their management and administrative fees as their plans grew larger and the 529 marketplace became more competitive.

    Still, the state you live in may not be as price-competitive as most. Once you decide which type of investment portfolio you want, check similar options in other states’ plans to determine how their costs compare.

    Another cost item to consider is the annual account maintenance fee charged by some 529 plans. Although the amount may not seem like a lot—typically $25 or less each year—many states have eliminated their account maintenance fees, or at least waive the fee for state residents.

  3. Flexibility. Some 529 plans have rules that are more restrictive than what the federal government requires in its tax regulations. For example, there may be rules that limit your options when withdrawing funds from your 529 plan; or that prevent you from transferring ownership of your account to someone else; or that make it more difficult than necessary to roll over your account to another 529 plan. Carefully read the official program disclosure statement for the 529 plan you intend to use prior to opening your account.
  4. Program strength. When it comes to choosing a 529 plan, millions of American families have “voted with their dollars.” If a 529 plan has attracted a lot of contributions, there are probably good reasons. A 529 plan that has been in place for several years, but has not been successful in attracting new accounts, may not have the ability to reduce costs or expand its investment lineup without undergoing major changes, such as the replacement of its program manager.

Using multiple 529 plans.

You are not restricted to using just one 529 plan. Some parents feel it makes sense to use multiple plans for the same beneficiary. The most common scenario is when a family wishes to take maximum advantage of an in-state tax benefit by using the in-state 529 plan. Since most states cap the amount of the benefit, the family may have additional dollars that they place in a different state’s 529 plan that has more attractive investment, cost, or flexibility features. Rarely will it make sense to open accounts in more than two different 529 plans.

Coming up:

Lesson 4: Get family and friends involved

Lesson 5: How will my savings affect financial aid?

Previously sent:

Lesson 1: How much to save

Lesson 2: Compare your options

 

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