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529 E-ditorials

00-11: Should you be waiting?
Joe Hurley
Monday, May 1st 2000

The flurry of activity at the state level is almost numbing. Section 529 is hot, and the proponents of college savings plans and prepaid tuition plans seem to be doing everything they can to create attractive investment programs within their states. Several new 529 plans have recently been signed into law, and many existing programs are undergoing renovation. The list of states where significant changes are happening is fairly long and includes the following:

Alaska, California, Colorado, Florida, Kentucky, Louisiana, Maryland, Mississippi, New Jersey, North Carolina, Ohio, Pennsylvania, Rhode Island, West Virginia, and Wisconsin.

Even in the states where things seem pretty settled, there may be some activity going on in the background that could result in substantial changes in the future. For example, some states, like Massachusetts, that currently do not provide any state-specific tax benefits for resident participants, may eventually succeed in getting legislation introduced and passed to create a deduction for contributions or exemption for distributed earnings. And other states, like Michigan, that show some interest in creating additional college savings options, may end up launching something in the foreseeable future.

With all these changes, the question facing the family interested in using 529 plans in saving for college is whether to invest now or wait until later. And while we might like to advise that families start saving with 529 plans as soon as they can, so that their investments begin taking advantage of tax-deferred growth, the fact of the matter is that in some situations it will pay to wait.

Sometimes a change will affect all accounts and so the timing of the contribution will not really matter. For instance, if a 529 plan reduces its expenses, existing accounts will benefit from that change as much as future accounts will.

But other changes are applied on a prospective basis. There are two that are particularly important. One is the choice of investment options offered by the 529 savings plan. If you invest now, and a new more attractive investment option opens up later on, you cannot simply redirect your account to the new investment option. You are stuck with your original investment, short of terminating the account or going through a qualified ""rollover"". (The rollover escape route may look promising, especially if you have two accounts with different but related beneficiaries that can merely be swapped, but this could turn out to be a hassle, particularly in states where the rollover mechanism is not well-tested.)

The other important potential change is the enactment of a tax deduction or credit for contributions into the 529 plan. If your state comes along with this incentive in 2001, and you dump all your savings into the plan in 2000, you may be out of luck and not get the extra benefit.

So it does make sense for interested 529 savers to look down the road and try to discern what may be coming along. In some cases, you may decide that it is indeed better to wait, or at least confine your investment to a 529 plan where it doesn't cost much to get in, and doesn't cost much to get out if you really want to (the 10% penalty on earnings may be fairly miniscule if your money has only been invested for a short while). In other cases, you may be comfortable with what is being offered now and commit at least a portion of your savings to one or more 529 plans. I include myself within this latter group.

When will all the states be settled with their 529 plans? The answer, it seems to me, is no time soon.

» 05-4: The 529 marshals have arrived - 08/30/05
» Our 5.29th-year anniversary - 06/29/05
» 05-2: 529s and the new Bankruptcy Act - 04/28/05
» 05-1: Reform or Deform? - 02/27/05
» 04-6: Perspectives on the 529 debate - 12/28/04
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