Are 529's Still Top Of Their Class? | Mortgage Planning for College Savings

Since their inception in 1996, the 529 has been the most popularized College Savings Plan...by name.  But what's interesting, is that over that same time 70% of parents saving for College don't use them (money mag).  Some say that they can do it better themselves, others want the flexibility in the open market (maybe others aren't sure that little Bobby or Janie will even make it).  Whatever the reason, we wanted to spend this week's installment of WCW to shine some light on the good & ugly of this wealth tool.

Fees
529 USUALLY beats out a taxable account earning the same return.  So whats the variable?  State management fees.  For example: Take 2 identical families, say they are both in a 28% tax bracket and both start throwing $200p/mo into their 529 when their child turns 5.  Family 1 lives in Utah and family 2 lives in Colorado.  Assuming identical average returns of 5%, when the children turn 18:
Family 1 = $39,100.
Family 2 = $35,900.

*Invest that same amount in a taxable account with equal fees and return and you'll have $36,200 after taxes.  in other words, while Family 1 is $2,900 up, Family 2 actually lost $300 AND HAS CEMENT SHOES for that money.
**Making matters worse, if you don't shop around or go direct, you could be paying as high as 5.75% in management fees ON TOP OF those numbers.  Be sure to shop around for a plan with annual expenses UNDER .5%.

Cement Shoes
Similar to the IRA and 401k that we've all been familiarized with now, the one big drawback comes when you need the liquidity the open market gives you if you think you might use that money for something else.  If you're in a 529, you'll pay income tax on the amount at your bracket + a 10% fee.  If you have the gift of foresight, there are some ways you can account for this when you start, like using a tax-efficient fund or swapping beneficiaries.

Options?
There are some "Educational Savings Plans" available out there that can give you some more variability if you need it, so consult with your financial advisor first if you have one.  If you don't, i know of a great friend that I know, like and trust that I could introduce you to.

You Do The Math
Compare 529 Plans and fees at CollegeSavings.org

Mortgage Planning
And before you go, make sure you ask about why the mortgage on your owner occupied residence could be the most effective pre-planning tool available.  Not JUST as a lever to extract your dormant equity, but also to help plan for what you and your college student CAN qualify for when it comes to State Sponsored Aid.  Eventually, a person might want to know why this is so important.

Comments

[Jeff Frese]

Once you open your 529 plan register it with Freshman Fund. Freshman Fund is like a registry for college savings. Parents go to the site, attach their 529, create a public profile and email friends and family a link where they can contribute directly into the child's 529 account in lieu of or in addition to the usual birthday/holiday gifts. Great for parents and great for gift givers and it's environmentally friendly gifting.

DISCLOSURE: I’m the founder of Freshman Fund. I was at my niece’s birthday party watching her tear through a pile of gifts taller than she was. At the end of the melee my gift was tossed aside into a pile of other forgotten gifts. I spent a-lot of time and money selecting her gift and I though it was a waste. I told her parents that from now on I was just going to contribute to her college savings. I asked them what website to go to in order to that and none existed. So I started Freshman Fund.