A
jumpy stock market
has made some parents wonder if they'll ever be able to save
enough to send their kids to college. But by taking advantage of
tax-favored accounts that let you save tax-free for college
expenses, you can put yourself back into the driver's seat and
get your kids the education they'll need to succeed in the
dog-eat-dog job market of the future.
When you look at the choices you have for saving for college,
529 college savings plans
give you a lot of advantages over the competition. But to make
the most of the opportunity that 529s give you, you need to pick
the best plan you can find. The right choice can put thousands
more into your pocket over the years. Below, we'll take a look at
the 529 plans that Morningstar chose as industry leaders, but
first, here's some background on why these accounts are worth
looking at.
Why 529 is a number you should remember
529 plans
look a lot like retirement accounts. As long as the money you
contribute stays inside the plan, you enjoy tax-deferred growth
on your investments. Moreover, just as Roth IRAs let you reap the
gains on your money tax-free if you wait long enough before
taking it out, 529 plans give you tax-free treatment of your
investment income if you use the money to pay college-related
expenses including tuition, books, and even room and board.
The complicated thing about 529 plans is that there are a huge
number of them. Each of the 50 states has at least one 529 plan,
and each offers different menus of investment choices -- as well
as associated investing costs and other fees. Because
you're not required
to use the 529 plan that your own state offers, deciding which
plans give you the best deal can take a lot of research.
Boiling down the choices
That's where Morningstar's annual look at 529 plans can save you
some legwork. In this year's edition, Morningstar noted several
favorable trends among college savings plans. Not only have
expenses started to come down, but plans are also working to
expand and improve their investment offerings, giving parents
better choices for how to invest their college savings.
But Morningstar's broad look at the industry still reveals
some plans that stand out from the crowd. In particular, 529
plans from Ohio, Nevada, Utah, Virginia, and Maryland topped the
list. You can see the full details here.
Less important than the plan specifics, though, are the
overall trends that those top plans share. For instance, four of
the five plans offer low-cost, high-quality mutual fund choices
from providers including Vanguard and
T. Rowe Price
(Nasdaq: TROW) . Moreover, even Virginia's CollegeAmerica plan
offers American Funds mutual funds through financial advisors at
relatively low cost, though the fees aren't quite as low.
But plans don't always make it easy for parents to separate
the good choices from the bad. Many 529 plans offer greater
varieties of higher-cost options that aren't necessarily your
best bet. For instance, the Ohio plan offers not only Vanguard
funds but also fund options managed by OppenheimerFunds,
General Electric
(
GE
) , and Pimco. Moreover, even plans that offer similar
investments often have vastly disparate fee schedules that make
their net costs much different.
More broadly, plans have started giving savers ways to invest
outside traditional mutual funds. A separate Virginia plan lets
savers put money into FDIC-insured accounts at
BB&T
(
BBT
) or
Union First Market Bank
, while the Ohio plan offers CDs from
Fifth Third
(Nasdaq: FITB) .
Watch out
Not all plans are so beneficial, though. Morningstar cites
Maine's NextGen College Investing Plan as below average, in part
because program manager Merrill Lynch, now a subsidiary of
Bank of America
(
BAC
) , was fined for not having good procedures to determine
suitability for its savers. Plans from
TD AMERITRADE
(Nasdaq: AMTD) and
Schwab
(
SCHW
) also got below-average ratings, with Morningstar citing high
fees.
In general, though, 529 plans can give you a lot of help in
saving for college. By paying attention to which plans get top
ratings, you'll be better positioned to make the most of your 529
opportunity.
For many parents, though, 529 plans should only be one part of
a larger investing picture. At the Fool, we've identified 11
rock-solid stocks that can help you secure your future. Check
them out here in this free special report.
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