The 529 plan is one of the most popular college savings plans available and there’s a good reason for that. First, the plans are low-maintenance. Second, they offer tax advantages that can help offset your tax burden and third, they have a lower impact on a student’s financial aid eligibility than other types of plans.
However, 529 plans are complex and sometimes choosing the right one for your needs can be difficult. Instead of jumping into unknown waters, check out these 4 things you should know about 529 plans.
1. Some are more expensive than others
It turns out that 529 plans come in two varieties. First, there are the typical plans that allow families to buy tuition units at today’s prices rather than the future rates when junior heads off to school. These tuition units are cashed in whenever the student goes to college. Second, there are plans that allow families to make investments in stocks that will allow their savings to grow (or shrink) according to the market.
Most states offer the 529 plans that are tied to the markets while only a handful allow families to buy prepaid tuition units. The prepaid units are generally considered a better deal because they are not tied to the market and they protect against inflation.
Regardless of which type of 529 you choose, both are associated with fees. Fees range in amounts, but can be as much as 1.88% of the value of the plan. Costs also vary between family-managed plans and broker-managed plans with the latter being more expensive.
2. There are risks involved
Most 529 plans sold in the United States are tied to the markets. That means when the markets are doing well, the plans are doing well. However, when the markets take a turn for the worst, the plans also lose value.
To offset some of the risk, it’s advised that individuals maintain a well diversified plan. Choose a variety of stocks to invest in so that if one goes down the entire plan doesn’t lose value. Mix low risk and high risk stocks for a nice, but comfortable return.
There are also a number of no-risk 529 plans available. Only a handful of states offer these plans, but they are insured by the FDIC so families can get the benefit of the 529 plan without the risk (or potential for growth) associated with the market.
3. They may not keep up with your child
Some of the most popular 529 plans are age-based target-date funds. They shift from aggressive to more conservative investments as the child approaches college age to ensure that market fluctuations do not impact the final amount.
Different plans have different targets for changing investment terms. Read the plan carefully to make sure that it will meet your families needs and re-evaluate the plan periodically to see how it is performing. If you need to, change plans. The IRS allows families to change portfolios in their 529 plans once per year.
4. Your state plan may not be the best deal on the table
Not all 529 plans are created equally. While they all come with federal tax benefits, some states also offer state tax deductions or credits too that can really add up.
A few states go even farther to offer matching grant programs that will contribute up to a certain amount of the family’s contributions. Eligibility requirements for these types of programs vary by state. While it may seem easy to just invest closet o home, evaluate different state plans to make the best financial move.
Doing your research and learning as much as you can about 529 plans before picking one will help you make a sound financial decision. Speak with a financial advisor if you have any questions or need help deciding which plan is right for you.