Not all 529 plans are created equal. Did you know that? You could have your kids’ college money in a pretty high-fee account, unaware that your money could do a heck of a lot better somewhere else. I want to help you figure out how.
What is a 529 plan?
It is a college savings fund that you set up for your child that can grow tax-free until it is withdrawn for approved educational use. Note the word ‘approved.’ If your child seems to be the backpacking-through-Europe-is-my-classroom type right out of the womb, you may rethink this type of savings because if it is not withdrawn for education, it will be heavily taxed. But let’s assume your child has some form of formal education in mind, post-high school.
What is this money invested in once it is inside this fund? If you guessed the stock market, you earn 5 points for Gryffindor! Most funds inside of your 529 are stock market funds. That means they are not invested in just a few cherry-picked stocks. They are invested in funds that hold a variety of stocks. We’ll discuss the most preferable type of funds below. The point I want to make here is that your 529 is about as volatile as your 401(k) because that is also heavily invested in the stock market.
529 Secret Tip!
Most people don’t know that they can buy an out-of-state 529 plan. They simply buy the one in their home state that someone tells them to. This can be a costly mistake because some 529s have really high management fees because most people just don’t know any better. But now you do!
You can buy a 529 plan anywhere in the country and not all state’s 529 plans are as great as the next state. We have our 529s in Utah because our wonderful fiduciary pointed out that the Utah plan has very low fees.
I have no stakes in referring you to any one plan but I HIGHLY encourage you to shop around on this website: www.savingforcollege.com. This will help you compare 529 plans by state, by fee, and by how much risk you can afford. More about that below too.
The thing to note about an out-of-state plan is that the state where you live may or may not allow you to claim your yearly contributions tax-free. This may not be a big deal though. For instance, if your state does NOT allow you to claim your contributions to your 529 tax-free, then you may have to pay tax on what you put in those accounts or tax on the out-of-state earnings. BUT the tax on that money may not be a big drawback if you are paying low fees and the fund performs well. You have to give this some serious thought because if you have chosen a high-performing/low-fee plan, you may be willing to accept current tax trade offs in order to really save some dough in your 529! You have to do the math. I wish I could do it for you but in a blog post like this, I cannot.
But if your state DOES allow you tax-free contributions to an out-of-state plan, you’re golden! Shop around with wild abandon!
So how do you know what your state’s rules are? Ask someone familiar in your state or start here.
How Do I Manage My 529 Investments?
Our 529 plan is invested in a way that is aggressive when the kids are small and gets less aggressive as they approach college age and our risk tolerance lowers. This stands to reason because you can afford some market volatility while the kids are in diapers. You cannot if they are seniors in high school. You can change the level of aggression as they age. Most funds make this pretty clear in your online account but if they don’t, seek help from someone who knows.
How Do I Know About The Fees In My 529?
Now about those investments and fees. Check out this Bankrate.com chart about the various fees that the banks charge you to manage the stock-based accounts inside of your 529.
In some cases, they can be as high as 10%. That is too high!!! A 10% management fee is just bullshit, plain and simple and no one should pay it! Look what that would do to your end result!
I think anything over 2% is too much. You simply don’t have to pay that. There are a lot of good plans with low management fees. These plans are mostly invested in Exchange Traded Funds (ETFs) instead of mutual funds, which are cheaper by design.
Can I Change Plans?
If you already have a plan, you can search for information on Savingforcollege.com and see how it performs. If it isn’t so good, it is not hard to transfer it elsewhere. About as hard as transferring any account. Not fun but not prohibitive.
How Much Can I Contribute To A 529?
The IRS allows up to $14,000 per year in contributions to a 529. This is per child. Each child needs his/her own 529 for his/her own education. Grandparents, friends, and other relatives can also contribute to this fund as long as it does not exceed this limit.
In 2010 the IRS began to allow you to use this money to buy your child education-related equipment like a computer for school but otherwise you have to use it to pay for an accredited educational institution. It can be a vocational school, however, so if your child wants to be an artist or a hair dresser, these schools count.
Given that I am about to pop with my 3rd baby, it is not lost on me how much these 529 plans advertise to new parents. These ads, along with the cord blood banking ads, play on our fears of not being able to care for our children properly. They irritate me quite frankly and remind me that both products – while useful in some cases – are highly profitable businesses. Which means that it is up to us as consumers to make the best choices possible and not feed the beasts of predatory products!
So how did I do? Did you get answers or come up with more questions about 529 plans? Let me know!
Disclaimer: I am not a certified financial professional. I just play one on TV. This blog is not to be confused with personal financial advice. It is my attempt to share with you what I have learned on my road to building my own family’s wealth. I hope you enjoy and learn from it!