Question: I am thinking about setting up 529 College Savings Plans for my children and am having trouble choosing which plan to use. What are the best and the worst plans?
Answer: Morningstar, a Chicago-based investment research company, reviews 529 plans annually. In their report published last month, their analysts identified 29 plans that are likely to outperform their peers on a risk-adjusted basis over a long period of time. Eleven plans earned Morningstar’s top Gold or Silver rating. They were: Alaska’s T. Rowe Price College Savings Plan, Maryland’s T. Rowe Price College Investment Plan, Utah’s Educational Savings Plan, Nevada’s Vanguard 529 College Savings Plan, Ohio’s CollegeAdvantage Plan, Virginia’s CollegeAmerica Plan, Michigan’s TIAA Education Savings Program, New York’s 529 Program (Direct), California’s Scholarshare College Savings Plan, Illinois’s Bright Directions Plan, and Virginia’s Virginia529 inVEST Plan.
The 2015 Morningstar picks for worst plans were South Dakota’s Allianz CollegeAccess 529 and Arizona’s Ivy Funds InvestEd 529 Plan.
Question: My research tells me that 529 plans are available from all 50 states and the District of Columbia. Can I get a deduction on my income tax return for contributions in?
Answer: While every state’s 529 Plan grows tax-deferred and allows tax-free qualified distributions, some states allow the account owner or contributor a current income tax deduction on contributions. Unfortunately, California does not, so California residents have no tax incentive to use California’s 529 Plan.
Question: What investments are available in a 529 Plan?
Answer: You want your contributions in a 529 Plan to grow and compound, so you want a plan with good investment options. The selection process can be a daunting task. If you are not well-schooled in how to select and manage investments, you will probably want some help.
Some state plans let you pick and choose your investments and others offer “canned” options. I will use Virginia and California plans as examples because they offer the two extremes.
In Virginia you need a financial adviser to invest in the CollegeAmerica 529 plan, which allows you to select from a large number of mutual funds within the American Funds group, including some target-date funds and multi-fund portfolio funds. With the help of your investment advisor you can build a well-rounded, diversified portfolio that suits your investment objectives, time horizon, and risk tolerance.
On the other hand, you can enroll directly in California’s Scholarshare College Saving Plan without going through a financial adviser. Tuition Funding Inc, a subsidiary of TIAA-CREF which currently manages California’s plans, offers age-based, multi-fund, and single fund portfolio strategies that allow you to build a custom strategy. Scholarshare offers both actively managed funds and passively managed index funds.
Question: What are the fees?
Answer: Fees vary by plan. The trend is toward lower fees, and some of the more expensive plans are now shut down.
Question: How do I research fees and other features of 529 Plans?
Answer: Use the Internet. You will find everything you need to know. Start with the IRS website and read their Fact Sheet 2009-12 article that describes 529 Plans and then read their “529 Plans: Questions and Answers.” Next, read the SEC’s publication “An Introduction to 529 Plans.” Then use the SavingForCollege.com and Morningstar.com websites to research available investments, fees, and other important details of each state’s plan.
Kenneth B. Petersen is an investment adviser and principal of Monterey Private Wealth Inc. in Monterey. Send questions concerning investing, taxes, retirement or estate planning to 2340 Garden Road, Suite 202, Monterey 93940 or firstname.lastname@example.org.