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COLLEGE SAVINGS 101

What is the first step in getting started with a 529 plan? (Script)

09/05/2014

QUESTION:
Enrolling in a 529 plan is quite simple, but there are some important things to consider. What is the first step?

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ANSWER:
I can’t believe September is almost here! For those who don’t know, September is recognized as College Savings Month, which means many states many states will be holding events and contests to raise awareness of the importance of preparing for future college costs and the benefits of Section 529 college savings plans.

Parents and grandparents have been well informed on the benefits of 529 plans and how they operate, but many are still unclear about how to get started. In honor of College Savings Month, we’re releasing a series of podcasts featuring Savingforcollege.com Founder Joe Hurley on “How to Get Started with a 529 College Savings Plan”.

Enrolling in a 529 plan is quite simple, but there are some important things to consider. Today Joe and I will be discussing the first step in the 529 saving process: Finding the best 529 plan for your needs.

There are over 100 529 plans available. How would you suggest a family begin their search for the most suitable plan?


Every 529 plan is different, so it’s a good idea to do some research. Savingforcollege.com offers some great resources to help you compare the features and benefits of different plans. You can also reference the Family Guide to College Savings or my book, The Best Way to Save for College – A Complete Guide to 529 Plans.

Almost every state offers a 529 plan, but no two plans are alike. The best plan for you will depend on the individual needs of the beneficiary.

Should you limit your search to plans in your own state?

You can open a 529 plan in almost any state no matter where you live, but your own state may offer special tax breaks for residents like a state tax deduction or credit.

You should start by looking into your own state’s options, but don’t automatically choose the plan simply because of a state tax break. Better investment performance and lower fees of an out-of-state plan could outweigh the tax benefits offered by your home state’s plan.


Will the beneficiary have to choose a school in the state where the plan is administered?

No, except for a few of the “prepaid tuition” type programs, 529 plans do not steer or limit your beneficiary to in-state colleges and universities. There are thousands of eligible institutions, including some foreign universities, trade and vocational schools and even online programs.

What are some other important features to look for?

Well, I’ve already mentioned that fees and investment options can differ among plans. Also, some 529 plans are less flexible than others. For example, if you look to transfer account ownership in the future, you may be surprised to find out that your 529 plans does not permit account owner changes.

Remember, every family is different and has their own unique needs. The best 529 plan is the one that provides the greatest return on your invested dollars by the time you need the money to pay for college with an acceptable level of investment risk, and gives you the fewest hassles or unpleasant surprises along the way.


But won’t it take a lot of time to do the comparisons and pick the right plan?

Well yes, it could. And it would be unfortunate if that kept you from getting an account going right away. Don’t be frozen into inaction. It’s probably better just to get started with your own state’s 529 plan. If you later decide that another state’s 529 plan is preferable, you can roll over your account to the new plan.

What’s the difference between advisor-sold and direct-sold plans?

Most states offer both direct-sold and advisor-sold plans. You can enroll in a direct-sold plan by simply visiting the plan’s website and submitting the required information.

An advisor-sold plan must be purchased through a licensed financial advisor or broker-dealer.

You’ll sometimes pay additional sales charges for using an advisor-sold plan, but you will save time and benefit from the advice and expertise of an investment professional. If you already have someone managing your retirement accounts and other investments it may make sense to have them handle your college savings as well.

You may also be able to get around some of those additional fees. For example, 529 plans are sold as different share classes, each with a different expense structure. A financial advisor can recommend the most appropriate share class depending on the amount you are investing and your time horizon. A fee-based financial planner may also have access to fee-waived share classes.

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