Find the Right 529 Plan -- Its in the Details!

Your first task as an investor is to determine whether you will invest with the 529 plan directly or use a financial adviser. If you need help deciding, see our article on direct vs. broker plans. Once you have decided how you will proceed, the hard work begins! Start with your state 529 plan Start by finding all the details for your own state's 529 plan. Some states offer residents tax deductions (or credits) for investing in-state, or offer to match contributions in some way. Some states have rules that tax you when you make withdrawals from an out-of-state plan. If your state offers no tax benefits, matching or cost when going 'out-of-state,' you are wise to search across the nation's 529 plans to find the ones with features that suit you best. Compare with out-of-state plans You should research the plans available to you in some detail. A savvy investor will compare the detailed features of each plan against another to see which offers the best combination. Plans have many features, so to help you compare we suggest tackling this comparison in three steps. Step 1: Identify any "must-have" features. As examples, you may feel you need a plan that: Other family members can contribute to. Allows for joint ownership or transfer of account ownership at any time. Has a minimum contribution level you can meet. Step 2: Identify the plans offering the best investments within your risk parameters. This exercise is not much different from picking mutual funds for your IRA or 401(k). Are you confident the investment managers in a 529 plan are going to do a good job for you? Are you a conservative investor or an aggressive one? Do you prefer an "age-based" approach that automatically adjusts the market risk of your 529 account as your beneficiary approaches college? Do you want your college savings invested in only one company's mutual funds? Or would you prefer a "multi-managed" program that blends together mutual funds from different fund companies. The investment vetting process is neither easy nor certain. Many 529 plans have short investment histories, and even those with longer histories may have made substantial changes in their portfolios along the way. Remember that in investments, past performance never guarantees future results. Nevertheless, you should start by reviewing the top 10 performing direct-sold plans. Step 3: Identify any other important differences between programs; they could be as simple as online account access or how good customer service is. Program fees and expenses are an obvious consideration, as they will directly affect your return. Less obvious considerations include such things as: Quality of the program call center when you have questions or need help. Frequency and content of account statements or online resources. Ease of requesting withdrawals. Likelihood that your state will not impose tax on qualified withdrawals. Remember, however, you are not locked into your original choice of a 529 plan. A concern that crops up later often can be alleviated by rolling over your account to another 529 plan (subject to rollover requirements). Now ... compare plans side by side To make it even easier, we have created a tool for you that allows you to select different plan features and compare plans side by side. We suggest taking the questions above and seeing how different plans address your specific needs. Compare features - Direct-sold plans Compare features - Broker-sold plans Posted September 11, 2009 Your first task as an investor is to determine whether you will invest with the 529 plan directly or use a financial adviser. If you need help deciding, see our article on direct vs. broker plans. Once you have decided how you will proceed, the hard work begins! Start with your state 529 plan Start by finding all the details for your own state's 529 plan. Some states offer residents tax deductions (or credits) for investing in-state, or offer to match contributions in some way. Some states have rules that tax you when you make withdrawals from an out-of-state plan. If your state offers no tax benefits, matching or cost when going 'out-of-state,' you are wise to search across the nation's 529 plans to find the ones with features that suit you best. Compare with out-of-state plans You should research the plans available to you in some detail. A savvy investor will compare the detailed features of each plan against another to see which offers the best combination. Plans have many features, so to help you compare we suggest tackling this comparison in three steps. Step 1: Identify any "must-have" features. As examples, you may feel you need a plan that: Other family members can contribute to. Allows for joint ownership or transfer of account ownership at any time. Has a minimum contribution level you can meet. Step 2: Identify the plans offering the best investments within your risk parameters. This exercise is not much different from picking mutual funds for your IRA or 401(k). Are you confident the investment managers in a 529 plan are going to do a good job for you? Are you a conservative investor or an aggressive one? Do you prefer an "age-based" approach that automatically adjusts the market risk of your 529 account as your beneficiary approaches college? Do you want your college savings invested in only one company's mutual funds? Or would you prefer a "multi-managed" program that blends together mutual funds from different fund companies. The investment vetting process is neither easy nor certain. Many 529 plans have short investment histories, and even those with longer histories may have made substantial changes in their portfolios along the way. Remember that in investments, past performance never guarantees future results. Nevertheless, you should start by reviewing the top 10 performing direct-sold plans. Step 3: Identify any other important differences between programs; they could be as simple as online account access or how good customer service is. Program fees and expenses are an obvious consideration, as they will directly affect your return. Less obvious considerations include such things as: Quality of the program call center when you have questions or need help. Frequency and content of account statements or online resources. Ease of requesting withdrawals. Likelihood that your state will not impose tax on qualified withdrawals. Remember, however, you are not locked into your original choice of a 529 plan. A concern that crops up later often can be alleviated by rolling over your account to another 529 plan (subject to rollover requirements). Now ... compare plans side by side To make it even easier, we have created a tool for you that allows you to select different plan features and compare plans side by side. We suggest taking the questions above and seeing how different plans address your specific needs. Compare features - Direct-sold plans Compare features - Broker-sold plans Posted September 11, 2009