Helping your kids go to college is a commendable goal for any parent. To make sure your children get the most from your money, however, you have to be smart about how you invest. Generally, so-called 529 plans are a good way to put money aside toward college savings. They give you tax-free growth on your investment, as long as you eventually use the money for college expenses. There are dozens of different 529 plans, many of which are tied to particular states.
Unfortunately, as with other investments, not all 529 plans were created equal. While many plans offer a broad range of investment options at a reasonable cost, a few plans have high fees and poor investment choices. Here are some tips to help you stay away from bad 529 plans:
1. Keep costs low.
529 plans often have several different costs associated with them. You may pay an administrative fee to oversee the plan, as well as management fees for your investment options. Some plans keep their total fees extraordinarily low, adding up to as little as 0.5% or less. Yet there are also plans that charge 2% or more in annual fees on your assets. For instance, in the case of Wyoming's College Achievement Plan, high fees by Merrill Lynch (NYSE:MER) kept asset levels low, forcing the state to create a partnership with Colorado's 529 plan. Over 10 to 15 years, those costs take a huge bite out of your college savings.
2. Get good investment choices.
The different investment options that 529 plans offer vary greatly from state to state. Some plans offer only a few prepackaged portfolios, giving you very little flexibility in structuring your account. Others give you dozens of individual fund choices that you can mix and match to your heart's content. Don't focus on the number of choices; instead, look for investments that fit with your savings strategy. Low-cost index funds are often the best option in these plans.
3. Look everywhere.
Your state probably has a 529 plan geared toward residents. But there's no requirement that you use your own state's plan; most states allow nonresidents to participate as well. Often, your best option will be in a faraway state's plan.
4. Get tax breaks.
Some states offer state income tax incentives to their residents for contributing to their home state's 529 plan. While the tax benefit may be valuable, it's just one factor to consider in deciding which plan is best for you.
5. Go direct.
With some plans, you have the option of either investing through a broker or sending your money directly to the plan management company. Even though the plan options are usually the same, going direct can save you commissions that would otherwise go to your broker. With some plans, however, there's no difference in cost. Check your plan's provisions carefully.
College savings is a complicated financial topic, but by following these simple guidelines, you can take a big step toward getting your kids to college. For more help, including specific advice on which plans may be best for you, watch out for the upcoming May issue of Motley Fool Green Light, in which Foolish fund expert Shannon Zimmerman will analyze various college savings options and help you decide which ones are best for you. Take advantage of our free trial offer to see how Motley Fool Green Light can make a difference in your financial life.
Related articles:
For additional information about how to save for college, be sure to look at the Fool's College Savings Center.
Fool contributor Dan Caplinger lives in Massachusetts, but uses the Ohio 529 plan for his daughter. He doesn't own shares of Merrill Lynch. The Fool has a disclosure policy.
