What if there were a guaranteed way to lock-in today's tuition rates at a diverse group of more than 275 private colleges across the country, for up to 30 years?
This could end up being a very significant benefit. According to data compiled by the College Board, the cost of attending a private, nonprofit, four-year college has been escalating rapidly. The 10-year percentage change in inflation-adjusted tuition and fees, from the 2003–2004 academic year to the 2013–2014 academic year, range from a low of 14 percent to a high of 48 percent, depending on the location of the college. The highest difference in cost was for colleges located in the Southwest. Schools located in the West had the lowest difference.
Assume today's tuition cost at the university of your choice is $35,000. If tuition rises at 5 percent a year, the cost of tuition at that school will be $57,011 in a decade. If you contributed $35,000 to a plan that guaranteed today’s tuition, your tax-free savings at the end of 10 years would be $22,011.
There is a way to protect yourself against these escalating costs. You can do so with a much underutilized and underpublicized plan called the Private College 529 Plan. It’s structured as a prepurchase of tuition and not as an investment. You won’t need to select investment options or be concerned about market volatility. The colleges and universities participating in the plan take the market risk and guarantee the plan’s obligations.
You can find a list of participating schools here. They include Stanford University, George Washington University, Emory University, Wesleyan University and Duke University. My alma mater, Johns Hopkins University, is also a participant. You can use accumulated prepaid tuition at any college that subsequently joins the plan.
The Private College 529 Plan has the same tax benefits as other 529 plans. As long as the money you contribute is used to pay tuition and mandatory fees at member schools, schools that don't have to be designated until the time of enrollment, there are no federal tax consequences. If you live in a state that offers a tax benefit for contributions made to any 529 plan, check with a tax professional to see if your contribution to the Private College 529 Plan can claim the same consideration.
Another significant benefit of the Private College 529 Plan is that 100 percent of your contributions go toward tuition. There are no entry fees, annual fees, service fees or exit fees. Although the Private College 529 Plan has many advantages, it does share the disadvantages attributable to all 529 plans. If you don't use the money contributed for tuition at a participating school, you'll be subject to a 10 percent penalty upon withdrawal. The penalty also applies if you contribute more funds than you end up using. You will be hit with the penalty when you redeem the excess funds.
This penalty can be particularly onerous if you need to withdraw the contributed funds due to an emergency, such as a health crisis. Contributing to any 529 plan decreases your liquidity. In addition, you are losing the opportunity to invest this money and possibly earn returns that may exceed the benefit you are gaining from participating in the plan.
Also, depending on where you live, your contribution to the plan may not qualify for any in-state tax benefits. Having assets in a 529 plan can affect the ability of your child to obtain other financial aid. However, for federal financial aid, 529 savings are considered parental assets, which are assessed in the formula for granting aid at a much lower rate. If your child applies for school-specific funding, the amount otherwise granted could be reduced if prepaid tuition credits are taken into consideration.
Although 529 plans permit changing the beneficiary without tax consequences if the new beneficiary is a "member of the family" as defined by the Internal Revenue Code, be sure any change you make qualifies. Otherwise, you could incur adverse tax consequences.
Finally, the Private College 529 Plan may limit the flexibility of the beneficiary to transfer from a college that is a participant in the plan to one that isn't. On balance, the Private College 529 Plan offers significant benefits for those who intend to attend a participating school. It should be seriously considered as part of your financial planning process.
Showing posts with label 529 Plans. Show all posts
Showing posts with label 529 Plans. Show all posts
Friday, January 23, 2015
Wednesday, October 22, 2014
Don't Get Sent to the 529 Penalty Box
The rules regarding what happens if you withdraw 529 assets for outlays other than qualified college expenses, such as tuition, fees, and room and board, don't get a lot of attention. Most investors who put money in 529s worry about being unable to save enough for college, not about saving more than they'll need. But for parents unsure whether their child will attend college--perhaps because of poor academic performance or special-needs challenges--the question of whether to put money into a dedicated college-savings vehicle, such as a 529, is very real.
The first thing to consider if you're unsure the beneficiary will attend college is whether the assets could be transferred to another family member. 529 assets may be transferred from the account of one family member to the account of another without penalty, and the list of potential exchange partners is rather broad. Not only can assets be transferred within the immediate family--from one sibling to another, for example--but families with unneeded 529 assets may transfer them to other relatives, such as cousins, aunts, uncles, and even in-laws.
However, not all families will want to or be able to take advantage of this provision. For example, not everyone wants to hand over the hard-earned money they've saved in a 529 account to an extended family member just to avoid paying taxes. And in some cases, families simply do not have any other relatives who can use the money for college. In cases like these, knowing the rules regarding withdrawals for unqualified expenses--which is accounting talk for taking money out of the account and not using it for anything college-related--is essential.
Expect to Pay a Federal Tax Penalty
Let's start by looking at the main reason investors use 529 plans to save for college in the first place: the tax advantages. Contributions to a 529 are not deductible on federal income taxes. But earnings on that money grow tax-free, and there's no tax on distributions as long as they're used for eligible college expenses. Plus, many states offer income tax deductions on contributions made to in-state 529 plans.
So what happens if the money is not needed or must be withdrawn early for some reason? In that case the earnings portion of the account is subject to federal income tax plus a 10% penalty as well as any applicable state and local income taxes. Withdrawals of the contributions are not subject to federal income tax because the contributions were made with aftertax dollars in the first place (in other words, no federal tax deduction was given on the contributions). For example, if you contributed $5,000 to a 529 plan--and over time it grew to $7,000--but then you had to use the money for nonqualified expenses, you would owe federal income tax on the $2,000 plus a 10% penalty on top of that amount. The 10% penalty is waived, however, if the beneficiary dies or becomes disabled, or if he receives a scholarship. (Most scholarships don't cover all college expenses, however, so there may well be other opportunities to use funds left in the account). The taxes are to be paid by whomever gets the distribution, which could be the account holder or, in some cases, the beneficiary.
Plans make distributions on a pro rata basis, which means that you can't simply request they pay you back your contributions and leave the earnings in the account as a way to avoid paying taxes and a penalty. (By contrast, you can withdraw your contributions from a Roth IRA at any time without taxes or penalty, while leaving the investment earnings alone.) Rather, if the account consists of two thirds contributions and one third earnings, two thirds of the distribution is taken from contributions and one third from earnings. Some plans do, however, allow account holders to take distributions from a specific investment option within the account, according to a spokeswoman from the College Savings Plans Network, a nonprofit organization that provides information on state-sponsored 529 plans. For example, an account holder who splits 529 assets for one beneficiary into two different investment options within the plan could request a distribution from just one of those options and pay taxes accordingly.
State Tax Break Could Be Jeopardized
The other important tax wrinkle to keep in mind if taking nonqualified 529 distributions involves any state income tax deductions you may have received for contributing to the plan. Many states offer residents such tax breaks for contributions made to an in-state plan, but they may also apply a clawback provision to recapture those unpaid taxes if the contributions aren't used as intended. That means for a nonqualified 529 distribution, you could be required to pay state income taxes on the contribution portion and not just on earnings.
Whether to fund a 529 account for a beneficiary who may not go to college is a very personal decision, and not necessarily one with a clear-cut answer. On the one hand, you'd hate to pay even more in taxes than you would by saving in a taxable account; this is because of the 10% penalty on 529 earnings for nonqualified distributions, not to mention the fact that those earnings would be taxed as ordinary income rather than at lower long-term capital gains rates. On the other hand, the federal and state tax breaks that could be worth thousands of dollars if the beneficiary does go to college are hard to ignore. Ultimately, only you can decide which risk is the one worth taking.
Let's start by looking at the main reason investors use 529 plans to save for college in the first place: the tax advantages. Contributions to a 529 are not deductible on federal income taxes. But earnings on that money grow tax-free, and there's no tax on distributions as long as they're used for eligible college expenses. Plus, many states offer income tax deductions on contributions made to in-state 529 plans.
The other important tax wrinkle to keep in mind if taking nonqualified 529 distributions involves any state income tax deductions you may have received for contributing to the plan. Many states offer residents such tax breaks for contributions made to an in-state plan, but they may also apply a clawback provision to recapture those unpaid taxes if the contributions aren't used as intended. That means for a nonqualified 529 distribution, you could be required to pay state income taxes on the contribution portion and not just on earnings.
Tuesday, September 16, 2014
Section 529 Plans: Estate Tax and Income Tax Advantages
The $5 million exemption from federal estate tax eliminates the need for many to do complex estate planning. Because the exemption amount is indexed for inflation, a married couple’s assets must exceed $10,680,000, before estate tax would apply, and then only at the second of their deaths.
So in contrast to prior years, when many taxpayers were encouraged to make lifetime gifts to reduce a 55% federal estate tax, now the advice for all but the very wealthy is to retain your assets to ensure there is enough to live on for your lifetime. Passing assets at death has a second advantage: the recipient of the assets obtains a "step up" in the assets' basis to fair market value, thereby avoiding income tax on the sale.
When is gifting appropriate for tax purposes? Certainly taking advantage of 529 plans makes sense for grandparents and parents seeking to accumulate funds for run-away college tuition costs. Contributions to a 529 plan are treated as gifts for tax purposes. The contributions qualify for the $14,000 annual gift tax exclusion (also indexed for inflation). Also, contributions can be pre-funded for five years, meaning $70,000 per parent (or $140,000 for a married couple). Thus, funds in the 529 are removed from the donor’s estate faster than if contributions were made each year. The donor must survive the five years, or a portion of the gift is retained to the taxable estate.
For federal income tax purposes, the investment grows tax-free, and distributions to pay for the beneficiary's college costs come out tax-free. State law can affect the state income tax treatment.
There are other advantages, such as the donor controls the funds in the 529. Contrast the donor’s control over a 529, with the donor’s lack of control (1) in a custodial account, where the recipient receives the funds at either age 18 or 21; or (2) with other gift strategies, where typically control is lost in order to receive the benefit of estate tax exclusion. Perhaps the only disadvantage for 529’s is if you are relying on financial aid, the 529 can be considered an asset, depending on who set up the plan, such as a parent or grandparent.
Even though many gifts no longer make tax sense, 529 plans remain viable options for both estate tax exclusion and income tax reduction, without much complexity and cost.
So in contrast to prior years, when many taxpayers were encouraged to make lifetime gifts to reduce a 55% federal estate tax, now the advice for all but the very wealthy is to retain your assets to ensure there is enough to live on for your lifetime. Passing assets at death has a second advantage: the recipient of the assets obtains a "step up" in the assets' basis to fair market value, thereby avoiding income tax on the sale.
When is gifting appropriate for tax purposes? Certainly taking advantage of 529 plans makes sense for grandparents and parents seeking to accumulate funds for run-away college tuition costs. Contributions to a 529 plan are treated as gifts for tax purposes. The contributions qualify for the $14,000 annual gift tax exclusion (also indexed for inflation). Also, contributions can be pre-funded for five years, meaning $70,000 per parent (or $140,000 for a married couple). Thus, funds in the 529 are removed from the donor’s estate faster than if contributions were made each year. The donor must survive the five years, or a portion of the gift is retained to the taxable estate.
For federal income tax purposes, the investment grows tax-free, and distributions to pay for the beneficiary's college costs come out tax-free. State law can affect the state income tax treatment.
There are other advantages, such as the donor controls the funds in the 529. Contrast the donor’s control over a 529, with the donor’s lack of control (1) in a custodial account, where the recipient receives the funds at either age 18 or 21; or (2) with other gift strategies, where typically control is lost in order to receive the benefit of estate tax exclusion. Perhaps the only disadvantage for 529’s is if you are relying on financial aid, the 529 can be considered an asset, depending on who set up the plan, such as a parent or grandparent.
Even though many gifts no longer make tax sense, 529 plans remain viable options for both estate tax exclusion and income tax reduction, without much complexity and cost.
Monday, August 25, 2014
The Best 529 College-Savings Plans
FROM KIPLINGER.COM
For most parents, saving for college feels like climbing to the summit of a very tall mountain. And it doesn’t help that the path keeps getting steeper; tuition hikes have far exceeded inflation over the past several decades. If your child is a newborn, expect a degree from a four-year, in-state public college to run about $222,000, assuming 5% annual growth in the cost of college; four years at a private school could be double that.
Luckily, tools are available to help you scale the heights. State-sponsored investment programs known as 529 plans, as well as other kinds of savings programs, can provide the momentum you need to reach your goal. And you probably won’t need to save the full amount. Most families get a discount in the form of grants, scholarships and education tax breaks and use loans to fill the gap—more than two-thirds of college seniors graduate with student debt.
A more realistic goal: Save about one-third of your expected college costs. When the time comes, current income, grants and loans can cover the rest. “Planning ahead is the key,” says Betty Lochner, of the College Savings Plans Network, which collects data on 529 plans. (To estimate what you’ll need to save under different scenarios, use the college-savings calculator by The College Board.)
The best place to save is in a 529 plan. Sponsored by 48 states and the District of Columbia (neither Washington State nor Wyoming offers a 529 savings plan), these investment accounts let your savings grow tax-free, and the earnings escape tax completely if the withdrawals are used for qualified college expenses, which include tuition, fees, and room and board. The appeal of 529 plans lies in their easy access as well as their tax benefits. The plans have no income limit and set a high cap on contributions. Two-thirds of the states and the District of Columbia give a tax deduction or credit for contributions. If your child skips college, you can make the recipient a sibling, grandchild, niece or nephew (or even yourself) without losing the tax break.
There are a few drawbacks. If you cash out for non-college purposes, you’ll owe income tax and a 10% penalty on earnings (but not on contributions). You may have to return any state tax deductions, too. Plus, you’re limited to the investment options in your plan. After you pick a portfolio, you must wait 12 months before you can change the investment mix or transfer the money to another plan.
Which plan?
Buy a 529 plan directly from your state if it offers a tax break. Most states offer two types of college-savings plans: a low-cost plan sold directly by the state and a higher-cost plan sold by a broker. The lower expenses of a direct-sold plan mean more of your money will go toward building your college fund. And in most cases, the state tax break will trump lower fees in an out-of-state program. (Go to the Vanguard 529 State Tax Deduction Calculator or Savingforcollege.com's State Tax 529 Calculator to find out what your potential tax savings would be in your state plan.)
If your state doesn’t offer a tax break—or if you live in Arizona, Kansas, Maine, Missouri, Montana or Pennsylvania, which offer a tax break no matter where you invest—you can search for the best state plan that meets your goals. Figuring out which plan that is depends on what matters most to you. Low fees? An aggressive or conservative investment track? A plan with lots of investment options?
States generally offer an array of choices, including age-based portfolios, which adjust the mix of investments automatically to become more conservative as your child ages; funds that focus on stocks or bonds (or both); and guaranteed-principal or principal-protected funds. But some plans offer better-performing funds and a more diversified mix of investments than others. And some plans charge lower maintenance fees, have funds with lower annual expense ratios, or both.
With the help of several databases—including research firm Morningstar’s 529 plan center, the College Savings Plans Network and Savingforcollege.com, all of which you can access—we looked for direct-sold plans that excel in various categories. See our state-by-state guide to our 529 picks for more.
Best for hands-on investors: The solid funds in the Utah Educational Savings Plan are mostly index-based. They include 18 from Vanguard and 6 from Dimensional Fund Advisors. And UESP ranks among the lowest-cost 529 programs in the country. But here’s what we really like about Utah for do-it-yourselfers: customization. As with most 529 plans, you can handpick individual funds from Utah’s so-called static portfolios. But this plan also lets you create a tailor-made portfolio and have it automatically adjust at three-year intervals according to your preferences as your child nears his college years. No other state plan offers this feature in its age-based tracks.
Best for low fees: New York’s 529 College Savings Program uses Vanguard funds, so it should come as no surprise that it has low costs. The average expense ratio charged by its underlying funds (0.17%, according to Morningstar) is significantly lower than the 0.76% expense ratio charged by the typical U.S. stock index fund. Even better, the plan has no annual maintenance fee.
We also like that the plan offers three age-based tracks with different risk profiles: aggressive, moderate and conservative. The aggressive track starts at birth with 100% in stocks and ends with 0% in stocks at age 19 (it’s 25% in the last three years of high school). New York’s age-based portfolios don’t include an international stock fund. But the program’s assortment of individual funds does have a foreign-stock option: Vanguard Developed Markets Index fund.
Best age-based plan for aggressive investors: If an aggressive track with top-tier funds is what you seek, you’ll find it in the Maryland College Investment Plan. From birth through age 4, the portfolio holds 100% stocks—including stocks in developed and emerging countries. As your child ages, the track adjusts every three years, ticking down its stock investments to 40% when your child hits age 14 and 23% at age 18. By contrast, the average 529 plan’s age-based allocation to stocks is 80% in the early years and 10% at age 19.
What’s more, Maryland’s 529 plan is packed with good funds from T. Rowe Price, including Blue Chip Growth, Mid-Cap Growth, Small-Cap Stock and International Growth & Income. The lineup helped the age-based track targeted for 2030 post a 14.0% three-year annualized return (through June 30), two percentage points ahead of the typical age-based track for children between birth and 6 years old.
Best age-based plan for conservative investors: This one is tricky. Some conservative age-based tracks are simply too conservative. The conservative age-based track of New York’s 529 plan, for instance, sets out at birth with 50% invested in stocks and pares that to zero by age 11. But at that age, you still have six or seven years before your child matriculates, and stocks offer the best chance of increasing the size of your portfolio. That’s why we like Utah’s moderate and conservative tracks for conservative investors. In the early years, both tracks load up on stocks (80% in moderate; 60% in conservative), but the mix trickles down to 0% stocks by age 19 in the moderate trajectory, and it goes to 0% by age 13 in the conservative path.
Best for nervous Nellies: After 2008, many plans added savings options backed by the Federal Deposit Insurance Corp. to their investment lineups. You won’t lose money in these kinds of funds, but you certainly won’t keep up with the rate of college-tuition inflation. Still, says Scott Kahan, a certified financial planner based in New York City, “If you have a big lump sum—enough money to put away for college—and you want to be conservative, or your child is going to college next year,” these savings plans can make sense. Many state plans have a high-yield savings account among their investment options. For stand-alone plans, we like the bank-sponsored option offered through Virginia’s CollegeWealth plan with Union First Market Bank. It recently offered a 2% yield (2.25% for balances greater than $10,000).
Best if you want hand-holding: Rather have an adviser do all of the work? That can be okay. Some fee-only advisers, such as Gifford Lehman, a certified financial planner in Monterey, Calif., set their clients up in direct-sold plans. (Lehman’s favorite plan is Utah’s.)
But if your adviser puts you in an adviser-sold plan, consider yourself warned: You’ll pay for that. Funds in adviser-sold plans cost an average of 1.28% in annual expenses, more than double the 0.60% average expense ratio for funds in direct-sold plans, according to Morningstar.
If you think the hand-holding is worth the cost, go with Virginia’s College America plan. It holds many top-notch American Funds, such as International Growth and Income and New Economy, which charge an average of 1.19% in expenses. (There is a $10 annual maintenance fee per account.) If your broker or adviser doesn’t have access to CollegeAmerica, try ARKANSAS’S ISHARES 529 PLAN, which invests in thrifty exchange-traded funds. The average annual expense ratio of the funds in the iShares plan is a low 0.59%. There’s also a $10 annual fee per account.
For most parents, saving for college feels like climbing to the summit of a very tall mountain. And it doesn’t help that the path keeps getting steeper; tuition hikes have far exceeded inflation over the past several decades. If your child is a newborn, expect a degree from a four-year, in-state public college to run about $222,000, assuming 5% annual growth in the cost of college; four years at a private school could be double that.
Luckily, tools are available to help you scale the heights. State-sponsored investment programs known as 529 plans, as well as other kinds of savings programs, can provide the momentum you need to reach your goal. And you probably won’t need to save the full amount. Most families get a discount in the form of grants, scholarships and education tax breaks and use loans to fill the gap—more than two-thirds of college seniors graduate with student debt.
A more realistic goal: Save about one-third of your expected college costs. When the time comes, current income, grants and loans can cover the rest. “Planning ahead is the key,” says Betty Lochner, of the College Savings Plans Network, which collects data on 529 plans. (To estimate what you’ll need to save under different scenarios, use the college-savings calculator by The College Board.)
The best place to save is in a 529 plan. Sponsored by 48 states and the District of Columbia (neither Washington State nor Wyoming offers a 529 savings plan), these investment accounts let your savings grow tax-free, and the earnings escape tax completely if the withdrawals are used for qualified college expenses, which include tuition, fees, and room and board. The appeal of 529 plans lies in their easy access as well as their tax benefits. The plans have no income limit and set a high cap on contributions. Two-thirds of the states and the District of Columbia give a tax deduction or credit for contributions. If your child skips college, you can make the recipient a sibling, grandchild, niece or nephew (or even yourself) without losing the tax break.
There are a few drawbacks. If you cash out for non-college purposes, you’ll owe income tax and a 10% penalty on earnings (but not on contributions). You may have to return any state tax deductions, too. Plus, you’re limited to the investment options in your plan. After you pick a portfolio, you must wait 12 months before you can change the investment mix or transfer the money to another plan.
Which plan?
Buy a 529 plan directly from your state if it offers a tax break. Most states offer two types of college-savings plans: a low-cost plan sold directly by the state and a higher-cost plan sold by a broker. The lower expenses of a direct-sold plan mean more of your money will go toward building your college fund. And in most cases, the state tax break will trump lower fees in an out-of-state program. (Go to the Vanguard 529 State Tax Deduction Calculator or Savingforcollege.com's State Tax 529 Calculator to find out what your potential tax savings would be in your state plan.)
If your state doesn’t offer a tax break—or if you live in Arizona, Kansas, Maine, Missouri, Montana or Pennsylvania, which offer a tax break no matter where you invest—you can search for the best state plan that meets your goals. Figuring out which plan that is depends on what matters most to you. Low fees? An aggressive or conservative investment track? A plan with lots of investment options?
States generally offer an array of choices, including age-based portfolios, which adjust the mix of investments automatically to become more conservative as your child ages; funds that focus on stocks or bonds (or both); and guaranteed-principal or principal-protected funds. But some plans offer better-performing funds and a more diversified mix of investments than others. And some plans charge lower maintenance fees, have funds with lower annual expense ratios, or both.
With the help of several databases—including research firm Morningstar’s 529 plan center, the College Savings Plans Network and Savingforcollege.com, all of which you can access—we looked for direct-sold plans that excel in various categories. See our state-by-state guide to our 529 picks for more.
Best for hands-on investors: The solid funds in the Utah Educational Savings Plan are mostly index-based. They include 18 from Vanguard and 6 from Dimensional Fund Advisors. And UESP ranks among the lowest-cost 529 programs in the country. But here’s what we really like about Utah for do-it-yourselfers: customization. As with most 529 plans, you can handpick individual funds from Utah’s so-called static portfolios. But this plan also lets you create a tailor-made portfolio and have it automatically adjust at three-year intervals according to your preferences as your child nears his college years. No other state plan offers this feature in its age-based tracks.
Best for low fees: New York’s 529 College Savings Program uses Vanguard funds, so it should come as no surprise that it has low costs. The average expense ratio charged by its underlying funds (0.17%, according to Morningstar) is significantly lower than the 0.76% expense ratio charged by the typical U.S. stock index fund. Even better, the plan has no annual maintenance fee.
We also like that the plan offers three age-based tracks with different risk profiles: aggressive, moderate and conservative. The aggressive track starts at birth with 100% in stocks and ends with 0% in stocks at age 19 (it’s 25% in the last three years of high school). New York’s age-based portfolios don’t include an international stock fund. But the program’s assortment of individual funds does have a foreign-stock option: Vanguard Developed Markets Index fund.
Best age-based plan for aggressive investors: If an aggressive track with top-tier funds is what you seek, you’ll find it in the Maryland College Investment Plan. From birth through age 4, the portfolio holds 100% stocks—including stocks in developed and emerging countries. As your child ages, the track adjusts every three years, ticking down its stock investments to 40% when your child hits age 14 and 23% at age 18. By contrast, the average 529 plan’s age-based allocation to stocks is 80% in the early years and 10% at age 19.
What’s more, Maryland’s 529 plan is packed with good funds from T. Rowe Price, including Blue Chip Growth, Mid-Cap Growth, Small-Cap Stock and International Growth & Income. The lineup helped the age-based track targeted for 2030 post a 14.0% three-year annualized return (through June 30), two percentage points ahead of the typical age-based track for children between birth and 6 years old.
Best age-based plan for conservative investors: This one is tricky. Some conservative age-based tracks are simply too conservative. The conservative age-based track of New York’s 529 plan, for instance, sets out at birth with 50% invested in stocks and pares that to zero by age 11. But at that age, you still have six or seven years before your child matriculates, and stocks offer the best chance of increasing the size of your portfolio. That’s why we like Utah’s moderate and conservative tracks for conservative investors. In the early years, both tracks load up on stocks (80% in moderate; 60% in conservative), but the mix trickles down to 0% stocks by age 19 in the moderate trajectory, and it goes to 0% by age 13 in the conservative path.
Best for nervous Nellies: After 2008, many plans added savings options backed by the Federal Deposit Insurance Corp. to their investment lineups. You won’t lose money in these kinds of funds, but you certainly won’t keep up with the rate of college-tuition inflation. Still, says Scott Kahan, a certified financial planner based in New York City, “If you have a big lump sum—enough money to put away for college—and you want to be conservative, or your child is going to college next year,” these savings plans can make sense. Many state plans have a high-yield savings account among their investment options. For stand-alone plans, we like the bank-sponsored option offered through Virginia’s CollegeWealth plan with Union First Market Bank. It recently offered a 2% yield (2.25% for balances greater than $10,000).
Best if you want hand-holding: Rather have an adviser do all of the work? That can be okay. Some fee-only advisers, such as Gifford Lehman, a certified financial planner in Monterey, Calif., set their clients up in direct-sold plans. (Lehman’s favorite plan is Utah’s.)
But if your adviser puts you in an adviser-sold plan, consider yourself warned: You’ll pay for that. Funds in adviser-sold plans cost an average of 1.28% in annual expenses, more than double the 0.60% average expense ratio for funds in direct-sold plans, according to Morningstar.
If you think the hand-holding is worth the cost, go with Virginia’s College America plan. It holds many top-notch American Funds, such as International Growth and Income and New Economy, which charge an average of 1.19% in expenses. (There is a $10 annual maintenance fee per account.) If your broker or adviser doesn’t have access to CollegeAmerica, try ARKANSAS’S ISHARES 529 PLAN, which invests in thrifty exchange-traded funds. The average annual expense ratio of the funds in the iShares plan is a low 0.59%. There’s also a $10 annual fee per account.
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