The 529 college savings plan can be a great option for parents looking to fund their child’s college education, but investors need to do their homework to get the maximum return for their money.
A 529 plan is an education savings plan operated by a state to help families save money to pay for college. Savers put after-tax college savings into an account that usually provides a wide range of mutual funds. Distributions and earnings are tax-free as long as they are used for higher education.
Assessing 529 Savings Plan Structures
Not all 529 plans are created equal. Do your homework by researching enrollment fees, annual management fees and asset management fees as well as the pre-set portfolio of funds or choice of funds for do-it-yourself investors. Some plans are sold directly, while others use brokerage firms, hence the differences in fees charged. You can invest in any state plan, although you can earn up to a $2,000 state tax credit for each year you contribute to the two Ohio plans.
Investment researcher Morningstar, Inc. has given Ohio’s direct-sale Vanguard Plan high marks, noting “the plan’s tax breaks, low costs and reasonable flexibility are tough to beat and an attractive indexing possibility for those living out-of-state. With a very easy set-up process, the Vanguard Plan should take most investors less than 20 minutes to establish.”
The advisor-sold Ohio plan from Putnam received less complimentary reviews from Morningstar. The Putnam plan was ranked among the five worst plans in the country due to “poor performance and troubling turnover among managers, analysts and executives.” according to the report. For those investors who prefer to have a financial advisor, we suggest looking at other state plans. Morningstar’s top five 529 plans include Virginia Education Savings Trust (direct-sold),Virginia CollegeAmerica (broker-sold), Illinois Bright Start (direct-sold), Maryland College Investment Plan (direct-sold), Colorado Scholar’s Choice (broker-sold).
Review additional information about 529 plans at savingforcollege.com.
As always, please consult your Rea advisor with any further questions.
This article was originally published in Illuminations: Facts & Figures from people with a brighter way, a Rea & Associates enewsletter, 5/21/2008.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.