Investing In A 529 Plan: Still A Smart Move?
Fri, 01/16/2009
Staff Writer
The cost of a four-year private college education has passed the $150,000 mark — which is “enough to cause even the most affluent parent to want to sit down and cry,” according to Kalman Chany, author of the 2009 edition of the Princeton Review’s “Paying For College Without Going Broke.” And in 2009, the average one year tuition cost (including room and board, books, and other fees) will be $35,958 — up 5.5 percent from the previous year. Financially savvy parents understand that they must save for their children’s college funds — and the earlier they begin doing so, the better. But with the economy in turmoil and the stock market losing more than 40 percent of its value in a matter of weeks, is a 529 plan still the answer?   The experts say yes. That’s because the alternatives — stuffing wads of cash under your mattress or putting aside the money in a low-yield savings account — are likely to lose value due to high inflation rates and even higher inflationary tuition rates. When investing with a 529 plan, your investment grows tax-free. And many states, including New York, offer upfront income tax deductions for your contributions. Currently, there are more than 10 million 529 accounts. At the end of 2007, about $112 billion was invested in 529 plans, up from less than $3 billion in 2000. In recent years, costs have come down and investment options (including index funds and money market funds) have expanded. The key is to choose the right 529 plan and then allocate funds properly. Those whose 529 plans were invested too aggressively in stocks saw their almost college-aged kids’ savings disappear as the accounts plummeted. When children are still young, though, there’s hope that the market will rebound during the number of years they have remaining before heading to college. To answer your questions, The Jewish Week spoke with industry expert Joseph Hurley, founder of Savingforcollege.com, a Bankrate company that independently rates 529 plans. Jewish Week: What is a 529 plan? Joseph Hurley: A 529 Plan is an education savings plan designed to help families set aside funds for future college costs. It is named after Section 529 of the Internal Revenue Code, which created these types of savings plans back in 1998. A 529 plan is almost like a Roth IRA for college; it allows you to contribute after-tax dollars, which grow tax-free when you use the funds to pay for qualified higher education expenses. What is included in “qualified higher education expenses?” Tuition, room and board (there’s often a requirement to be at least a half-time student), books, supplies, and equipment. What are the benefits of investing in a 529 plan? By investing in a 529 plan, your investment earnings are tax-free when you use them to pay for your college costs. In addition, 34 states plus the District of Columbia offer a state income tax deduction when you contribute to a 529 plan. In New York, couples can deduct up to $10,000 in 529 contributions ($5,000 for those filing alone). To get this deduction, however, you must contribute to New York’s 529 plan. With more than 100 529 plans in existence, how do I choose the best one for me or my child? First, look at your own state plan to see what it offers. You may get special benefits, including state income tax deduction or an expense break. Then, feel free to shop around. You many find that you prefer investment options offered by different 529 plans. Most people prefer an age-based option that automatically adjusts the asset allocation as a child grows older.   What are some of the biggest misconceptions people have about 529 plans? They assume that they have to go to school instate. But that’s not true. The decision of which state plan to use does not affect which college your child attends. Also, the types of schools that are eligible are very broad. It includes two-year schools and vocational schools. Basically any school where students can apply for financial aid. What happens if a student gets a full scholarship or chooses not to attend college? You can change the beneficiary of the 529 plan to another family member or hold onto it until you have grandchildren, without repercussions. Are there any changes in the law that will affect 529 plans? Currently, 529 plan holders are restricted to making investment switches in their accounts only once a year. People are sometimes concerned that’s not flexible enough, especially when the market does what it’s been doing. In 2009, the IRS will allow up to two investment decisions. But it’s left up in the air what will happen in 2010. What are the restrictions affecting 529 plans? While most 529 plans don’t have an annual maximum contribution limit, most have an overall limit of $300,000 per child.   How do you set up a 529? It’s a very easy process. You just need the name and address of the person setting up the account and the beneficiary. You can sign up on your own or through a broker. At www.savingforcollege.com, we offer a tool for comparing different 529 plans, and directly link to the individual sites. We rank historical investment performance and overall usefulness, and you can see which plans have been performing the best. Freshman Fund: Facebook Meets 529 Plans Jeff Frese showed up to his niece’s birthday party last year with a beautiful doll he had hand picked for her. Yet, by the end of the birthday party, there was a giant pile of toys in one corner — and his niece was sitting in the middle of the room, playing with a cardboard box. “I was glad I got her a doll,” he later told his friends. “But I kind of wished I’d put the money in her college fund instead.”   Frese teamed up with Jason Olim, Jonah Keegan and Chris McAleen to found FreshmanFund (FreshmanFund.com), a college savings registry that allows friends and family to easily contribute $5 to $250 to a loved one’s 529 plan. The site simplifies giving the gift of college savings. Since launching in August, more than 850 families have joined FreshmanFund.  The company takes a 5 percent surcharge, so a $50 contribution would cost $52.50. “Education is central to our Jewish tradition,” says Matt Olim, the chief technology officer at FreshmanFund. “Freshman fund is an innovative way for communities to help ensure a good college education for their children.”