Tuesday, February 16, 2010

Research The Various 529 Plans - Part 2

Tip #232 - Research The Various 529 Plans - Part 2. In Part 1 of this series, we discussed how important it is to do your research before you decide whether investing in a 529 Plan is appropriate for you. Once you looked over all of your other choices for saving for education and decide that you do indeed want to contribute to one, it is time to figure out which state’s plan you want to invest in. Nearly all states offer a 529 Plan. Usually the plan is run by a financial management company such as Vanguard or Fidelity. The plan is not run by the state’s government.

It would seem that the easiest thing to do is invest in your home state’s plan. There may be benefits to going with your own state’s plan. Sometimes the state will give you a break on your state taxes if you invest in their plan whereas they don’t give you a break if you invest in another state’s plan (some do, though). However, sometimes with even the tax break, there may be better plans out there for you. That is because not all states’ plans are created equal. Some offer more and better choices. Some have lower fees. Some have sales charges. So it is important to shop around for the best state's plan to invest in. And then once you chooose that, you need to decide which investments to make your contributions to.

In general, most plans offer investments based on the age of your child. The younger he/she is, the riskier the investments are. And as the child gets older, the less risky the fund becomes. So the fund manager is always adjusting the balance of stocks, bonds, and cash in the fund to make the risk consistent with the time your child has left until college. The closer you child is to college, the less risky the account becomes. You can put all of your money into the plan based on your child’s age and not have to worry about doing any risk adjusting yourself. Of course, many people who did that were very disappointed and not prepared for the huge losses (on paper) that their accounts generated last year.

Most states also have other options where you decide how to invest that are not based on age – such as various mutual funds at all levels of risk and money market funds. These types of investments require more involvement and knowledge on the part of the investor. And it gives the investor more control.

So how do you know which state plan and which investment within that plan is the best for you? Fortunately, there is a detailed 529 site, Saving For College that can give you all the information you ever wanted to know about the 529 Plans. Read over this site and get to learn even more about the 529, its benefits and risks. And read about the different states’ plans and the different types of investments they offer. Also, check out this article in Kiplinger that compares the 529 plans. The great thing about this article is that it does a great summary of which state’s plan is best to invest in based on where you live.

If you are serious about saving for college and have decided that a 529 Plan is right for you, start doing your research. It’s not as simple as deciding to invest. You have to figure out which state is best for you to go with, and then which investment within that state is one you are comfortable with.

In Real Life (IRL) – I have mentioned a few times that I don’t yet have money invested in a 529 Plan. In some ways it seems like it was a good decision when you hear about all of the losses that people have taken with their plans. But investing and taking some losses (especially when they are just on paper) is better than not investing at all.

At this time we just don’t have extra money to sock away for college beyond the $2,000 per year per child that we are doing. At the rate we are saving, we will have enough for probably only one year of college per child. But we are not planning to invest at this rate forever, and hope to star contributing to a 529 Plan once I start back at work, which right now is looking like it will be later rather than sooner.

I have read over Virginia’s 529 Plan a few times. And according to Kiplinger and other sources, it is one of the better plans out there, especially if you are a resident since we get to deduct some of the contributions from our income for our state taxes. So if and when we gather up enough money to make some 529 contributions, that’s where the money will probably be headed. Knowing me and how I like to control my investments, I probably will not put the money in an age-based investment, or at least not all of it. But for now I am holding tight. How about you? Do any of you invest in a 529 plan for your child? Are you happy with it?


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