Choosing a 529 College Savings Plan that will support your military kids
Saving now for your military children's higher education? Who isn't?
Look into a 529 College Savings Plan. It's not just for military college-bound kids - it makes great sense for college-bound kids everywhere.
A 529 is, very simply, a college savings plan based on a portfolio designed to grow enough to cover college costs in the years you'll need it. When you select a 529 College Savings Plan, there's no need to select stocks, bonds or funds on your own and then manage the money diligently until your child enters school. You choose one age-based fund in a 529, and your work is done. The 529 fund will shift gradually from stocks to bonds as your child nears college age.
Your 529 earnings are tax-free as long as the money is used for college costs such as tuition or room and board. And most 529 College Plans let you set up an automatic investment plan. Now come the hard part: which 529 College Plan to choose? Because not all 529 College Savings Plans score A+
With more than 80 different 529 college savings plans to choose from, picking the right one for your military kids can seem overwhelming. Each 529 College Plan has its own fee structure, investment options, and tax benefits. You may want to enlist the support of your financial planner - many people do. In 2006, 77% of 529 College Plan sales in 2006 were through a broker or financial adviser. Just remember that financial adviser can take up to 5.75% of your investment for his commission, in what is known as a "front-end load."
Almost every state offers a no-load option in addition to adviser-sold plans. So with a little bit of the military attitude, you can research the best plan for your family, yourself.
Where to start your search? Always check out your home-state's plan first, because it might come with the best state-tax benefit. As of January 2008, thirty-three states plus the District of Columbia offered a front-end tax incentive for in-state investing, a tax break may give your home-state's plan a decided advantage. Actual tax breaks vary by state; its up to you to see how the numbers add up and to determine how good a deal is your home-state's 529 College Plan.
So in-state College 529 Plans can offer a home-state advantage - but not always. Nebraska residents who choose to invest in the 259 College Plan of their home state often find it to be better skipping the state-tax break and going with a lower-cost plan out of state. (On the other hand, Nebraska's 529 College Plan is one of the best performing 529 plans, even after expenses)
Run the numbers yourself using the NASD's 529 Plan Expense Analyzer. It will tell you how your investment will grow in two different plans, given their annual costs, projected rates of return and the potential tax breaks.
And if you live in states that have no state tax or offer no tax benefits, just shop for the best plan available.
Be aware that fees charged by many 529 College Plans can be outrageously high and hard to understand.
Montana's or Arizona's Pacific Funds 529 College Plans can charge as much as 2.5% of assets a year. Rule of thumb: any plan that charges more than 1.5% should be considered "outrageous."
Less costly College 529 Plans are becoming more readily available and can be found with low-cost providers like Vanguard and TIAA-CREF. To identify low-cost College 529 savings plans, look for expense ratios ranging from 0.65% to 0.70% of assets when investing in a plan that's built around inexpensive index funds, and 1% to 1.1% for plans that use more expensive actively managed funds.
529 College Plans offer a limited range of investment options; some static portfolios can be 100% stock or 100% bond funds, or you can choose age-based portfolios that are a mix of stock and bond funds which shift to become more conservative as college time approaches. The best offerings tend to be provided by well-known mutual-fund families like Vanguard, Fidelity Investments and TIAA CREF.
In 28 states, you're entitled to a tax deduction or credit for money you put into your local 529.. Stay with your state plan if you earn a generous tax break, if you don't have to pay a sales charge to invest, and if the plan's annual expenses are no more than 1% a year.
If not, Utah's 529 may be your best option.
Last word of advice: if you're not sure your military child wants to attend college - and not all need to do so - keep your options open. Withdrawals taken to pay for something other than qualified education costs are subject to a 10% penalty. Consider keeping your military money growing in a taxable account, until you're certain the money will be spent on college.
