Texans’ Options with 529 Education Savings Plans
January 27, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
Many states provide an incentive for their residents to use their state’s 529 plan through use of a state income tax deduction. Because Texas doesn’t have a state income tax, your options are really completely open in terms of what state’s 529 savings plan you use. You can go shopping for the best options and lowest costs for your particular situation. You can also use any state’s plan regardless of where your child plans to attend school.
Understanding the pros and cons of 529 plans
529 plans represent a solid savings opportunity because of the opportunity for the money to grow tax-free over an extended time horizon. Funds are deposited after tax. Principal and earnings may be withdrawn for qualified educational expenses tax-free. The more time you have, the more beneficial the tax-free growth is. But even within a year or two of starting college, 529 plans can be helpful.
There are also drawbacks to 529 plans. You lose flexibility in how you use the funds — if you withdraw funds for non-qualified expenses, you will be subject to income taxes and a 10% penalty on the portion representing earnings. 529 plans also carry increased investment expenses and have fixed investment options.
Selecting the Right Plan for you
In determining which plan is right for you, there are some factors that matter to everyone and some unique to your situation. Everyone’s consideration should include review of:
- quality of investment options offered in the plan
- costs of the plan — both administrative fees and investing costs (these vary widely from state to state)
- ease of access in opening your account, recurring deposits, withdrawals, investment changes, and reviewing statements
Most states also offer a direct plan option and an advisor option. The direct option allows you to open an account directly with the state’s plan without paying any investment sales commissions. The advisor option generally results in you paying investment sales commissions up to 5.75% on all deposits into your 529 plan. These commissions can require you to save a lot more to reach your savings goals. You can still use the direct plans and receive advice from an advisor on college planning and investing even by working with a fee-only advisor.
Other factors that may be relevant to your particular situation:
- Specific plan rules around which relatives can be named as a beneficiary in the event you want to transfer your 529 account balance to a different beneficiary.
- Contribution maximums
- Time limits for using your 529 account balances
- Investment options that match your particular needs:
- for a child close to college a guaranteed principal plus interest option is a must
- for someone who doesn’t want to monitor and adjustment their investments on an ongoing basis, a target-date investment program may be attractive that gets more conservative as the child get closer to college (although you need to exercise caution in selecting these)
One of my favorite sites for comparing different option 529 savings plan options is www.savingforcollege.com. Providing recommendations on how much you need to contribute, how your contributions should be invested, and which plan offers the best balance of low fees, features, and investment options for your situation is also one of the services that Keener Financial Planning provides.
College Pricing Trends
October 29, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
Every October, the College Board releases its Trends in College Pricing report that highlights college cost increases and trends. While costs can vary significantly by region and individual college, the College Board publishes average cost figures, which are based on its survey of 3,500 colleges across the country.
Here are highlights from its latest report:
- At four-year public colleges for in-state students, tuition, fees, and room and board increased by 5.9% from last year, with the total cost for 2009/2010 averaging $19,388
- At four-year public colleges for out-of-state students, tuition, fees, and room and board increased by 6.0% from last year, with the total cost for 2009/2010 averaging $30,196
- At four-year private colleges, tuition, fees, and room and board increased by 4.3% from last year, with the total cost for 2009/2010 averaging $39,028
“Total average cost” includes tuition and fees, room and board, books and supplies, transportation, and a small amount for miscellaneous expenses.
To read the Trends in College Pricing report, visit www.trends-collegeboard.com.
Student aid trends
The College Board is quick to point out that the average “sticker price” cost figure is not necessarily representative of what most students pay. That’s because almost two-thirds of undergraduate students receive grants that reduce the actual price of college. The largest provider of grant aid is individual colleges, followed by the federal government, private sources and employers, and state governments.
For the 2009/2010 year, the College Board estimates that students at public colleges will receive an average of $5,400 in grant aid from all sources and federal tax benefits, and students at private colleges will receive an average of $14,400 in grant aid from all sources and federal tax benefits. Federal tax benefits include the American Opportunity tax credit (formerly called the Hope credit), the Lifetime Learning tax credit, and the deduction for qualified higher education expenses.
Every year, the College Board also releases a sister report to Trends in College Pricing, called Trends in Student Aid, that examines student financial aid in more detail. To read this report, visit www.trends-collegeboard.com.