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May 11, 2010 | Posted By: Mark Riddix
With graduation season fast approaching, you are probably thinking about the best way to prepare for your childís college tuition. Whether your child is in grade school or high school; itís never too early to start planning for college. A great way to save for college is by investing in a 529 plan.
Hereís what to look for when picking the best 529 plan:
Compare plans across state lines.
Select the plan that best meets your needs regardless of location. Although you can invest in a 529 plan in any one of the 50 states, your best bet may be to invest in your home stateís plan. Most state plans offer a tax deduction on contributions made to 529 plans. The catch is that that most plans require you to be a resident of the state to qualify. This tax break could allow a couple to deduct as much as $10,000 from your taxes. If you are going to invest in an out of state plan, be sure that the returns justify missing out on the tax deduction.
Decide between a prepaid plan or a college savings plan.
If you know that your son or daughter is going to attend college in state then go with a prepaid plan. Prepaid plans lock in tomorrowís tuition prices based on todayís rates. You make a fixed number of payments for a number of years and your childís college tuition is guaranteed at any eligible state institution. Prepaid plans are only available to state residents. College savings plans are invested in mutual funds and rely more on investment growth to save or college. They have the potential for capital appreciation which would lessen the amount you need to save but they also have the risk of going down in value. College savings plans can be used towards educational expenses at any college nationwide but are not guaranteed to cover the cost.
Stay away from plans with high fees.
Pick a plan with low fees. Fees differ among plan providers. Some providers charge application fees, annual fees, asset management fees, transaction fees and low balance fees. These fees will eat up your returns over time. If you want to cut down on costs, consider a direct sold plan. Direct sold plans are bought directly from the planís sponsor thereby allowing you to avoid paying sales fees. Adviser sold plans are typically bought from brokerage firms and they often come with load fees attached. Sales charges typically range from a modest 1% to an exorbitant 5.75%. Ouch! A 5.75% sales charge is a big hit to your overall return.
Pick a plan with a ton of investment options.
Be sure to pick a plan provider that you trust. Your management company should have an established history with a solid reputation. Look for a plan that has a nice mixture of fund offerings which will help provide you with diversification. For example, funds advisers like Vanguard and T Rowe Price offer stock, bond, index, and target date funds. Having more fund options will make it easier for you to build a portfolio that fits your needs. As your child gets older you will want to rebalance your portfolio from stock funds to bond funds. Target date funds do the heavy lifting for you by automatically rebalancing your portfolio annually. Be sure to evaluate the performance of the fund over the past 5 to 10 years.
Mix and Match.
Are you still having a tough time trying to pick the right plan for you? Donít worry! You can pick more than one 529 plan. For example, if you donít like the options in your stateís plan but want to take advantage of the tax deduction; you can invest in another stateís plan as well. This gives you twice the investment options and the tax break. Itís a win win situation!
As you can see, saving for college does not have to be an overwhelming issue. With proper planning and the right strategy, you will be on your way to sending your child to school debt free.