A 529 plan can be a very useful tool to help parents save for their children’s college education. However, when choosing a plan, you should pay close attention to several factors, especially taxes and fees. It could prove costly if you don’t.
Tax Issues Draw Attention
One of the main benefits of 529 plans is that they are exempt from federal taxes. At the state level, however, tax treatment varies. State tax issues have drawn regulators’ attention to the way 529 plans are marketed. Recently, the National Association of Securities Dealers (NASD) began investigating 15 unnamed securities firms and their sales of 529 plans. The issue is whether these firms steered too many investors into 529 plans outside their home states, without investors fully understanding that they could lose certain tax advantages by choosing these plans. NASD Vice Chairman Mary Schapiro noted that some of these firms placed more than 90 percent of the 529 money they received into plans in states where the investor was not a resident.
In State Versus Out of State
Selling an out-of-state plan is not necessarily a violation of any rule – the in-state plan may have high fees, be performing poorly or offer no state tax deduction. However, if your advisor recommends an out-of-state plan, be sure to ask why. Also find out what, if any, tax benefits you may lose by investing in that plan. Weigh any lost tax benefits from foregoing an in-state plan against any additional benefits from an out-of-state plan.
If you are already invested in an out-of-state plan and discover that you are losing tax benefits, you can roll over your account to a new plan. There may be fees involved though, and if you move your funds to another state’s program, you may end up owing taxes.
Fees and Disclosures
Meanwhile, the Securities and Exchange Commission (SEC) is investigating the management fees charged for 529 plans. Public-disclosure requirements for these plans are not standardized. Securities laws don’t require that 529 investors get the same periodic reporting that mutual fund investors receive, nor do they mandate the same quality of information. Determining the true cost of a 529 plan and comparing that with the cost of other similar plans is therefore extremely difficult. In some cases, different states may charge different fees for the same underlying investment.
Do Your Homework
529 plans do offer a great way to save for your child’s education, but no two plans are the same. The important point is to thoroughly research your choice of a 529 plan and ask questions. For more information, see 529 Plans.