529 Plans: Share the Good, Bad and Ugly

[mjbaby]

I'm thinking of starting 529 plans for my children in addition to other forms of saving for college. Anyone have experience with them?

 

[NJDisney]

I have not started one yet but I have been told that I should fund my Roth IRA fully first before starting a 529. The Roth IRA can be used for education expenses and doesn't count towards financial aid

 

[Swimalie]

I started my son's when he was a year old (I also fully fund my Roth and my husband maxes out his work's TSP). We went with our home state since it is on the "honor roll" (see below) but we read in to other's before we made the decision. This is the guide that we went by:

http://clarkhoward.com/liveweb/shownotes/category/7/76/215/381/

By Clark Howard -- Updated for 2010!

I want you to know the best way to save for your son or daughter for college. But first remember my rule that you shouldn't save a penny for college unless you are already saving the maximum you can for your own retirement. College can be paid for with grants, loans, scholarships and work. Retirement happens only if you have saved the dough.

College savings plans -- known as 529 plans -- allow you or a relative or a friend to put money aside for a child's college education. The plans grow tax free and are spent tax free for eligible college expenses such as tuition, books and fees. If your child doesn't need the money, it can be transferred to any other child and spent tax free. If your child qualifies for a "free ride" full scholarship for college, you can withdraw the 529 money and use it for anything and just pay tax on the earnings. If your child doesn't go to college and you just take the money for yourself, you pay the tax on the earnings plus a 10% penalty.

My 529 guide for 2010 has nothing but good news. I have added many more plans than in any prior year. You can thank our nasty recession for that. 529 plans have become a much better deal as plan administrators have found it much harder to get parents to contribute. That has led to an old fashion market share war among the various plans with management fees dropping in state after state.

When you open an account, your money is invested in a pool much like a mutual fund. I recommend that you look at the investment option available in most plans known as the "age based portfolio." This lets the plan adjust to a more conservative mix of investments as your child gets closer to college age.

Here is something really confusing: Plans must be sponsored by a state even though residents of most states can put their money in any state plan. Even more confusing, a state can sponsor more than one 529 plan. Three states have 5 different plans. I have never found more than one top flight plans in any one state. This is key. When you see your state listed below, make sure you only invest in the exact state plan I show. Otherwise you could end up in a stinker of a plan. I have a direct link for you to the good plan in a state. If you just click on my link below you won't mess up and go to a bad state option.

I have two lists for you. If your state is on either list, choose it, because there may be state tax benefits that would make it a wise choice for you. However, if your state is not listed or you do not qualify for your state tax benefits, put your money in Utah, Iowa or New York. They are my 3 favorite plans in the country because of extremely low costs. First among equals is Utah, the nation's finest 529.

***Dean's List with High Honors***
These are the very best plans in the country. Put your money here if your state isn't listed in the Honor Roll.
State Plan information
Utah Utah Educational Savings Plan Trust
Iowa College Savings Iowa
New York New York's College Savings Program - Direct Sold


***Honor Roll***
If you are a resident of a state below, enter that plan to get state tax benefits and/or lower expenses offered to residents.
State Plan information
Alaska University of Alaska College Savings Plan
Arizona Fidelity Arizona College Savings Plan
Arkansas Gift College Investing Plan
California The Scholarshare College Savings Plan
Colorado Direct Portfolio College Savings Plan
Connecticut Connecticut Higher Education Trust
Delaware Delaware College Investment Plan
Georgia Path2College 529 Plan
Idaho Idaho College Savings Program (IDeal)
Illinois Bright Start College Savings Program Direct Sold Plan
Indiana College Choice 529 Direct Savings Plan
Kentucky Kentucky Education Savings Plan Trust
Louisiana Start Saving Program
Maine Next Gen College Investing Plan - Client Direct Series
Maryland College Savings Plans of Maryland - College Investment Plan
Massachusetts U.Fund College Investing Plan
Michigan Michigan Education Savings Program
Minnesota Minnesota College Savings Plan
Mississippi Mississippi Affordable College Savings Program
Missouri MOST - Missouri's 529 College Savings Plan
(invest only in Vanguard options)
Nevada The Vanguard 529 Savings Plan
New Hampshire Unique College Investing Plan
New Mexico The Education Plan's College Savings Program - Direct Sold
North Carolina North Carolina National College Savings Program
(invest only in Vanguard options)
North Dakota College SAVE 529 Plan
Ohio Ohio College Advantage 529 Savings Plan
(invest only in Vanguard options)
Oklahoma Oklahoma College Savings Plan
Oregon Oregon College Savings Plan
(invest only in Vanguard options)
Pennsylvania Pennsylvania 529 Investment Plan
South Carolina Future Scholar 529 College Savings Plan - Direct Sold
South Dakota College Access 529 - Direct Sold
Texas Texas College Savings Plan
Vermont Vermont Higher Education Investment Plan
Virginia Virginia Education Savings Trust


Which investment do I choose?
Most 529 plans allow you to go into an age based portfolio. I like that. The money for your child is adjusted into more conservative choices as your child gets closer to age 18.

Or consider a Coverdell. The Coverdell account allows you to save money for college or private school grades 1 through 12. The money is spent tax free like a 529 account as long as it's used for education. Coverdells limit your contribution to $2,000 per year. Rather than needing a state sponsor you set up your Coverdell wherever you wish: at a bank, a broker, an insurance company, a credit union or a mutual fund outfit. My first choice again would be a low cost mutual fund company. The huge advantage of the Coverdell is the use for private school. The disadvantage is you have to choose and manage your own investment choices.

One caveat here about Coverdells: Parents won't have the tax-free haven of the Coverdell education savings account to pay for private school after this year. The tax break will be sunsetted at the end of 2010 unless Congress steps in with a renewal, which is unlikely. So you should probably consider emptying your account to pay tuition now before the year is out. If you normally pay per semester, pay upfront for a full year.

You can also look at the excellent and versatile Independent 529 plan. You prepay tuition at participating colleges' current prices. If your child decides to attend another school, you simply get the return (profit or loss) on your contributions through the years.

So, how do I buy them?
529 plans must be sponsored by a state. All 50 states have plans that are managed for them by stock brokers, insurance companies or mutual fund companies. Most money going into 529s is getting there through what are known as "intermediaries." That means commissioned sales people, stock brokers, financial planners, insurance agents, etc. If you put money in this way you will pay large commissions as high as 5.5% to have your money put aside for your child. That means each dollar instantly becomes 94.5 cents. In addition, many plans have gigantic management expenses that destroy your child's savings. Those expenses are as high as 1.5% or higher.

I recommend that you buy 529 plans direct without commissions and buy low cost plans only. The list above is my honor roll of plans. These are all top plans that are all of equal value and promise. I've listed them in alphabetical order to make it easier to find your state. If your state is listed, buy its plan as you may get a state tax benefit as well. If your state is not listed, don't buy your state plan. Rather pick one of these low cost ones. Most of the low cost plans are run by the nation's two lowest cost financial houses, Vanguard and TIAA-CREF. Remember, with their plans you pay no commissions and management expenses around .50% to .80%.

Good luck!