COLLEGE SAVINGS 101

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The anti-529ers
http://www.savingforcollege.com/articles/the-anti-529ers

Posted 2012-04-11

by Joseph Hurley

Financial Professional Content

I am convinced, as are most professionals who work with 529 plans every day, that these tax-advantaged investment programs are the way to go for most American families looking to save for future college costs. In fact, we have used 529 plans to pay for the bulk of college costs for our own family's two children, and have generally been very satisfied with the investment performance along with the substantial tax breaks.

But I recognize there are a significant number of investment professionals and financial advisers--perhaps more than I would like to admit--who do not like 529 plans and do not recommend them to their clients. They have their reasons, and I respect their opinions, but I suspect that many of their anti-529 comments come more from a lack of knowledge and experience than from objective data.

A case in point is a recent opinion piece in the San Diego Daily Transcript entitled "529 plan tax benefits don't outweigh poor investment performance." The writer, president of a wealth management company, prefers "not to use 529 plans... but rather invest the money properly, and pay tax on the gain."

Apparently, the writer is convinced that he can do much, much better than a 529 plan through stock picking and market timing. And perhaps he can, but I would not give credence to that claim without seeing the data to support it. Most 529 plans consist of closely-scrutinized investments managed by many of the world's top investment managers.

He also cites an article "stating that 85 percent of registered investment advisers do not actually like 529 plans." In fact, the survey he is apparently referring to, conducted by the Tuition Plan Consortium, did not find that RIAs "do not like" 529 plans. Rather, 88% of RIAs "had concerns" about 529 savings plans. The wording makes a big difference. I am a huge advocate for the use of 529 plans, yet I have concerns about certain aspects of them myself. The TPC survey also found that 95% of RIAs commonly recommend 529s to their clients.

The final reason cited for not liking 529 plans is the IRS restriction to one investment change in any calendar year. For anyone who wishes to argue against using 529 plans, this rule is the easiest weapon to deploy, although not the most valid. (I personally have made investment changes in our 529 accounts that got around this restriction simply by switching our kids as beneficiaries on the accounts.)

But because the once-per-year restriction on investment changes is so easily and effectively used as an argument against 529 plans, and causing many parents to avoid 529 plans when they should be using them, I believe Congress and/or IRS should relax that rule.

Financial Professional Content

I am convinced, as are most professionals who work with 529 plans every day, that these tax-advantaged investment programs are the way to go for most American families looking to save for future college costs. In fact, we have used 529 plans to pay for the bulk of college costs for our own family's two children, and have generally been very satisfied with the investment performance along with the substantial tax breaks.

But I recognize there are a significant number of investment professionals and financial advisers--perhaps more than I would like to admit--who do not like 529 plans and do not recommend them to their clients. They have their reasons, and I respect their opinions, but I suspect that many of their anti-529 comments come more from a lack of knowledge and experience than from objective data.

A case in point is a recent opinion piece in the San Diego Daily Transcript entitled "529 plan tax benefits don't outweigh poor investment performance." The writer, president of a wealth management company, prefers "not to use 529 plans... but rather invest the money properly, and pay tax on the gain."

Apparently, the writer is convinced that he can do much, much better than a 529 plan through stock picking and market timing. And perhaps he can, but I would not give credence to that claim without seeing the data to support it. Most 529 plans consist of closely-scrutinized investments managed by many of the world's top investment managers.

He also cites an article "stating that 85 percent of registered investment advisers do not actually like 529 plans." In fact, the survey he is apparently referring to, conducted by the Tuition Plan Consortium, did not find that RIAs "do not like" 529 plans. Rather, 88% of RIAs "had concerns" about 529 savings plans. The wording makes a big difference. I am a huge advocate for the use of 529 plans, yet I have concerns about certain aspects of them myself. The TPC survey also found that 95% of RIAs commonly recommend 529s to their clients.

The final reason cited for not liking 529 plans is the IRS restriction to one investment change in any calendar year. For anyone who wishes to argue against using 529 plans, this rule is the easiest weapon to deploy, although not the most valid. (I personally have made investment changes in our 529 accounts that got around this restriction simply by switching our kids as beneficiaries on the accounts.)

But because the once-per-year restriction on investment changes is so easily and effectively used as an argument against 529 plans, and causing many parents to avoid 529 plans when they should be using them, I believe Congress and/or IRS should relax that rule.

 

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