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

By: Savingforcollege.com


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


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.

Popular Questions


Two kids, two 529 plans?

Dear Big Bill,
While it's possible to maintain a 529 plan in just one child's name, even when you intend to send more than one child to college, I generally recommend that families open a separate 529 account for each child.

That's assuming there is no additional cost to maintaining multiple accounts. If your 529 plan charges an annual or quarterly account maintenance fee, check to see if you can avoid the fee by signing up for automatic contributions through payroll deduction or electronic funds transfer)

With a separate 529 plan for each child, it becomes easier for you to tailor the mix of stocks, bonds and stable-principal investments (e.g., stable value, guaranteed principal and money market funds) to the particular ages of your children. When your older child is nearing high school graduation, you may want to ratchet down the level of market risk in her 529 plan. At the same time, you could keep a more-aggressive asset allocation in your younger child's 529 plan, accepting more risk for a potentially higher return. Many 529 plans offer "age-based" investment options that automatically make these adjustments as the beneficiary ages.

Separate accounts for your children also offer more gift-tax leeway. Since your 529 contributions are treated as gifts from you to the account beneficiary, your $15,000 (in 2018) annual gift exclusion will go twice as far with two accounts -- one for each child -- than with just one account.

Financial aid is another reason to recommend maintaining separate accounts. You wouldn't want the investments reserved for your younger child's future college expenses to count against your older child's financial aid eligibility. Be warned: The rules here are rather murky, and the impact of a sibling's 529 account may depend on the college's own policies as well on as the type of aid -- federal or institutional -- being sought.

Finally, I believe that separate 529 accounts allow for better family bookkeeping. There will never be any doubt as to your intention to help send all of your children to college. You'll avoid the uncomfortable position of being asked to explain to a curious 8th-grader why account statements are showing up in the mail with only a brother or sister's name on them. And in the event of your death or divorce, no matter how unlikely, your legal representatives and other family members will have less reason to question your actions in setting up and funding the 529 plans.

Even with separate accounts, you'll continue to have the flexibility to shift the money around in the future. You simply need to make sure that whenever funds are withdrawn from the 529 plan to pay for college they are coming from an account in the name of the child incurring the costs. It's a simple matter to change the beneficiary designation among family members at any time, transfer 529 funds between different family members' accounts or split one 529 account into two. The ability to move assets around the family is a key advantage of 529 plans when comparing other college-savings alternatives, such as Uniform Transfers to Minors Act, or UTMA, accounts.

Original Post: 2005-10-13
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Coverdell ESA vs. 529 Plan: Which to choose? (Script)

The Coverdell ESA and the 529 plan are both excellent college savings vehicles because they are both tax-free when used for college. But many families face a choice: do they use a 529 plan for all of their child's college savings, or do they use a Coverdell for the maximum amount of $2,000 each year and put any any extra savings above $2,000 into a 529 plan? In spite of its low annual contribution cap, Coverdell's are now attracting quite a few families. There are two major reasons for that. One is that only the Coverdell allows you to self-direct your investments, just like you might self-direct the investments in your IRA. The other is that in addition to college expenses, Coverdells can be withdrawn tax-free to pay for a broad range of K-12 expenses, while 529 plans are limited to K-12 tuition. This feature is appreciated most in families planning to send their children to private grade schools, which may include additional costs such as room and board or uniforms. A 529 plan, on the other hand, does not impose age limits or income limits like the Coverdell does and so overall we see a lot more money going into 529 plans than into Coverdells. Plus many savers are happy with the investment choices offered by the 529 plans and don't necessarily want to self-direct their investments. And don’t forget this: your state may be giving you a state tax deduction for using a 529 plan, but there are no states offering a state tax deduction for investing with a Coverdell ESA.

Learn more about Coverdell ESAs.

Original post date 2013-07-15
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Top 529 Plan Withdrawal Tips. (Script)

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Top 529 Plan Withdrawal Tips. (Video)

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