Most financial advisers recommend using the 529 Plan offered by your state of residence because you may receive state tax benefits for your contributions. However, what do you do if you have mediocre investment returns, high fees, and limited investment options or flexibility?
If you are happy with the flexibility and tax advantages of your current plan, consider changing your investments inside the plan. 529 Plans, generally, allow you to change the way your future contributions are invested at any time. Many plans offer age-based portfolios that become more conservative as the child reaches college age. While this autopilot feature is designed for ease, you should review your options each year, as you should your 401(k). If you are unhappy with the age-based allocations, you should be able to change future contributions to equity and bond allocations of your choosing. If you decide not to use an age-based allocation, rebalancing each year becomes increasingly important. If you want to change the investments for existing contributions, the rules are a bit more complicated and vary by plan. The government authorizes plans to allow you to change the investment option for your existing contributions once per calendar year without having to change the beneficiary; however, plans are not required to allow you to do so.
Paying high fees will cut into your savings. You should look at both the investment fees and the program management fees charged by the plan’s administrator. You should also compare what you may save in fees to any state income tax benefits you may receive. If you choose to invest in a different state’s 529 Plan, you’ll want to do a “same beneficiary rollover.” Generally, you are allowed to roll over a 529 Plan into another state’s plan for the same beneficiary every 12 months, without triggering a federal penalty; however, some plans will charge a fee.
In addition to the fees, when examining the other plans you should review the plan features that are important to you, which may include the annual contribution limit, the cumulative contribution limit, and flexibility in terms of transferring account ownership or directing new contributions to different investments.
Although most 529 College Savings Plans offer a variety of investment tracks, you may still prefer to have more control over your college investments. You may consider a Coverdell Education Savings Account, which allows you to choose your underlying investments. But, be aware that you can contribute significantly less per year to a Coverdell Education Savings Account than you can to a 529 Plan. Another option available is to open a taxable investment account for your child. Not only can you choose the investments, but your child can use the money for non-education expenses, such as, buying a home or starting a business. Depending on your child, this may or may not be a good option.
William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.