GI Bill and Military Education

529 COLLEGE SAVINGS PLANS
Growing Your Military Money

Saving 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 College Savings Plan is built around an investment portfolio, designed to grow enough to cover college costs in the years you'll need it. 529 College Plans offer a 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.

When you select a 529 College Savings Plan, there's no need to select specific stocks, bonds or funds on your own and then manage the money diligently until your child enters school. You choose one age-based fund for your 529 College Savings Plan and your work is done.

All 529 College Plans begin to shift funds gradually from stocks to bonds as your child nears college age, making the money more readily available for educational use.

The best part: your 529 College Savings Plan earnings are tax-free as long as the money is used for college costs such as tuition or room and board. Most 529 College Plans let you set up an automatic investment.

Which 529 College Plan to choose? 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. 77% of all 529 College Plan in 2006 were through a broker or financial advisor. Just remember that your financial advisor may take up to 5.75% of your investment as his commission, in what is known as a "front-end load."

Almost every state offers a no-load option, so if you want to avoid the financial advisor's fee, you can do the legwork yourself and save money. Apply some military determination and do your own research and you can find the best 529 College Plans for your family's college education.

Where to start your research? Always check your home-state's plan 529 College Plan first; it might offer 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, which is just the tax break that may give your home-state's plan a decided advantage. Actual tax breaks vary by state; it's up to you to see how the numbers add up and to determine how good a deal your home-state's 529 College Plan is for you.

In many states, you're entitled to a tax deduction or credit for money you put into your local 529 College Plan. Stay with your state plan if you earn a generous tax break; if you don't have to pay a sales fee to invest; and if the plan's annual expenses are no more than 1% a year.

In-state College 529 Plans with a state tax advantage aren't always the best bets. Nebraska residents who choose to invest in the 529 College Plan of their home state may find it more advantageous to skip their state-tax break and choose a lower-cost plan out of state. (On the other hand, Nebraska's 529 College Plan is also one of the best performing 529 plans, even after expenses).

Run the numbers yourself using the NASD's 529 Plan Expense Analyzer. It will let you compare how your 529 investment will grow in two different plans, the projected rates of return and the potential tax breaks.

Utah's 529 College Plan is particularly popular, so you may want to include it in your comparison shopping.

If you're lucky enough to live in a state that has no state tax, be aware that you'll get no tax break for your 529 College Plan.

Some states do charge fees for 529 College Plans and those fees can be hard to understand, and expensive. For instance, Montana's or Arizona's Pacific Funds 529 College Plans can charge as much as 2.5% of the assets per year.

Rule of thumb: any College 529 Plan that charges more than 1.5% fee should not be considered.

Less costly College 529 Plans are always available. 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 invest in the more expensive actively managed funds.

Last word of advice: if you're not sure your military child wants to attend college - and not all do - keep your options open. Withdrawals from a 529 College Plan taken to pay for anything 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 that money will be spent on college.