Shortcut to Super College Savings Plan

March 19, 2014 | By Steven DiGregorio

For parents looking to plan a college education, here are three numbers that will make the task much easier:…5… 2… 9!

We’re talking about 529 college saving plans, which are named for the IRS tax code that created them. With a 529, you can save for college tax-free, as long as the money is used for higher-education expenses. Despite the tremendous tax advantage, 529 plans are still under utilized — only 25% of parents saving for college are putting money in a 529, according to a recent survey by lender Sallie Mae.

College Savings Plan 529

Calculator: How much will college really cost?

Why are families missing out on 529s? Well, chalk it up to confusion. Nearly every state has its own plan, and some operate more than one, so shopping around can be daunting. You can invest in nearly any state’s 529, not just your own. Much like a 401(k), each 529 presents you with a wide array of investment choices to sort through. Still, you can quickly drill down to the right choice for you — just follow these five steps:

  1. Check out your state’s tax breaks. First determine what tax benefits your state offers — most states let you claim a deduction for contributions to a 529. Go to SavingForCollege.com to look up each state’s tax breaks for the respective 529 plans. If you live in a state with no income tax, or one that doesn’t offer a tax deduction, you’re free to look elsewhere. You can also shop around if you live in one of the six states that allow you to deduct contributions to any state’s 529 plan.
  2. Assess your state’s plans. If your state offers tax breaks, you could be better off investing at home, especially if the deductions are generous. There are exceptions to that rule. When the local 529 offers poorly performing funds or charges high costs — say, more than 0.5% — you may do better by going elsewhere. For those planning to invest for young children, you may be able to start out with your in-state plan and later roll over your money to a better plan elsewhere. Some 14 states allow you to move your funds to an out-of-state 529 without penalty as long as you stay invested for a few years.
  3. Keep your costs down. For many years 529s levied higher fees than retail brokerages did for comparable offerings, which took a big bite out of returns. But competition is finally pushing down costs.
  4. Consider if the option of an age-based fund is right for you The simplest choice for many can be an age-based portfolio, which is similar to a retirement target-date fund: You get immediate diversification and the asset mix shifts to become more conservative as your child nears college. That automatic feature is especially helpful for 529s, since you can generally make only one investment change a year. Just be sure you’re comfortable with the asset mix, since some age-based portfolios are more risky than others — an aggressive fund for a 10-year-old might have 70% in stocks, while a conservative choice might hold less than 30%.
  5. Protect your portfolio. When you’re one or two years away from paying that first tuition bill, you may want to shift out of the age-based fund to even safer assets. Just make sure they really are safe. Generally speaking, 529s offer many low-risk options, such as a high-quality short-term bond fund, which is likely to hold up relatively well if rates rise. You can look up the average maturity and credit quality of the mutual fund at Morningstar.com. Many 529s also offer stable value funds, which are backed by an insurance company and hold a steady net asset value — they pay a yield equivalent to a short-term bond fund. And some plans, like Ohio’s “CollegeAdvantage 529”, let you invest in bank CDs. You can’t get safer than that.

In the end, the most powerful aspect of any well planned investment is time.
The sooner you get started the more you’ll have in the end!

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The information herein contained does not constitute tax or legal advice. Any decisions or actions should not be made without first consulting a CPA or attorney.

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC.

Spire Wealth Management, LLC is a Federally Registered Investment Advisory Firm. Securities offered through an affiliate, Spire Securities, LLC. Member FINRA/SIPC

Tags: 529 plan, age based, college, college savings, contribution, deduction, deductions, FASFA, financial aid, higher education, parents, savings, tax credit, tax free, tuition

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STEVEN M DIGREGORIO is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC.
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