Posted: December 11th, 2009 | Author: Joe | Filed under: Saving | Tags: 529 savings plan, college savings, prepaid college tuition | 1 Comment »
One of the painful lessons of 2008 was that 529 college savings plans can lose money. Sometimes, a lot of money.
529 plans, like 401(k) retirement plans are simple constructs for holding your savings; in the case of 401(k), it’s savings for retirement, while a 529 holds savings for college costs. But if you happen to invest those savings in aggressive stock funds, then you could be in for a bumpy ride. Like it, or hate it that’s part of the reality of these plans.
But now some college 529 prepaid tuition plans are now at risk.
Prepaid 529 plans are supposed to avoid the roller coaster-like ups and downs of a traditional 529 plan because they allow parents to buy tuition credits at a price slightly above the value of the tuition today, and cash them in at “face value” when the child goes to college. Think of it as a savings bond, as opposed to investing in the stock market.
The problem is that the state typically assumes the risk for the prepaid plans, and more and more states are realizing they’ve spent themselves into bankruptcy and never saved for the time when the economic boom would go bust.
Alabama’s Prepaid Affordable College Tuition plan may collapse, and other states are limiting enrollment or drastically increasing the cost of the tuition credits. While no one has yet lost money or benefits in these prepaid plans, there is a risk that many may not have been aware of previously.
According to the College Savings Plans Network:
Thirteen states offer prepaid tuition plans that are open for new enrollment, either currently or seasonally. Another two, Kentucky and West Virginia, have been closed to new enrollment for several years. The Colorado and New Mexico plans have been permanently shut down to any enrollment and will close when the last beneficiary finishes school.
Many who have paid into these accounts and purchased tuition credits believe that the program is guaranteed and that their money will be available at the time their child is enrolled in a school of higher learning. Unfortunately, this is not true.
According to The New York Times:
Of the 18 prepaid plans, 16 are underfunded, meaning they don’t have enough money to pay future tuition obligations. And only a handful of plans are fully guaranteed by the state.
All of this adds up to fiscal irresponsibility and broken promises on the part of state government officials. The lesson here is clear: nothing comes without risk, and parents need to do their due diligence and weigh these risks against those of other college saving methods.
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Posted: December 3rd, 2009 | Author: Joe | Filed under: Saving | Tags: 529 savings plan, college savings, Saving | 1 Comment »
529 plans have been an increasingly popular way to save for college now for a number of years, but recent data suggests that parents are dropping out of 529 plans. Some are opting for other methods of saving, while others simply can’t afford to save for college.
According to this Wallstreet Journal article, the amount contributed to 529 plans in 2006 and 2007 was over $15 billion, while the contribution amount for 2008 was a relatively minuscule $5 billion.
Obviously, much of this is for the same reason many workers have ditched their 401k plans – the market crash of ’08 has convinced them that the stock market is not a safe place to put their money.
They’re right of course, to a point. It all depends on your time horizon. If you’re looking to retire in the next 3 years, you shouldn’t have 70% of your 401k in stocks. Similarly, if your child is going to college in the next 3 years, you shouldn’t have 70% of the child’s 529 account in a stock fund. It’s simply too risky that late in the game.
But this doesn’t mean that 529 plans or the stock market in general is the wrong place to be if the time before you’ll need the money in over a decade. The article profiles some people who are so scared to invest that they now are making some really questionable moves, giving up potential growth in years to come for safety today.
This is all very similar to the outcry to fix or scrap the 401k plan, but just like 401ks, it’s not 529 plans that are the problem, but people’s ignorance and unreal expectations.
The article does have some good alternatives to 529 plans, though each carries its own kind of risk: 529 Savings plans,529 Prepaid plans, Coverdell Education Savings Accounts, Custodial Accounts, Savings Bonds.
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Posted: November 19th, 2009 | Author: Joe | Filed under: Saving | Tags: 529 savings plan, Best, college savings | No Comments »
This list is from Kiplinger’s personal finance magazine “Best Of” edition.
Best 529 for low fees.
Kiplinger’s pick: Illinois’ Bright Start College Savings program. It’s no surprise that this plan is run by Vanguard, since they are known for their rock bottom fees.
Best 529 plan for fund selection.
Kiplinger’s pick for 529 plan with the best fund selection goes to the College Savings Plan of Nebraska. This 529 offers 20 funds to choose from. It’s unclear from the article however whether this fund has the most funds to choose from, or the best funds to choose from.
Best 529 plan sold by a broker.
If buying shared in your 529 college savings plan is important to you, then Kiplinger recommends Virginia’s CollegeAmerica plan, which offers 22 funds from American Funds.
Best 529 for maximizing your savings.
If you live in a state that offers a tax deduction on your 529 contributions, then you should start by investigating the 529 plan offered by your state of residence. If the plan is a truly rotten one, then you may still be better off using a different state’s plan, but it may be difficult to make up for the tax break depending on your personal tax situation.
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Posted: September 5th, 2009 | Author: Joe | Filed under: Investing, Saving | Tags: 529 savings plan, college savings, Investing, Taxes | No Comments »
529 college saving plans are tax deferred investment accounts that are a lot like a 401(k) plan except instead of saving for retirement, you’re saving for college. Just as with 401(k) plans, some 529′s carry a wide assortment of investment options to choose from and this can sometimes get complicated.
But for most people, a 529 saving account is pretty straightforward. Most experts recommend you select an age-based fund that gradually shifts from a more aggressive stock heavy portfolio to a more conservative bond or cash heavy portfolio as high school graduation nears. It’s also common advice to go with your in-state plan, as most states offer a tax deduction for the amount of money contributed to the plan.
But common sense, and conventional wisdom are not always absolute.
For example, the state tax deduction for contributions only makes sense if you live in a state that collects income tax. If you’re lucky enough to live in a state that has no income tax (like Florida or New Hampshire), then you’re not really benefiting from that part of the plan.
There’s more wrong with conventional advice when it comes to 529 plans.
Many 529 plans offer age-based options that are similar to target-date options found in many 401(k) plans. But age-based options carry the same risk as target-date funds that hi-lighted by the After Hours Investing blog post Beware Target-Date Funds! . Namely, age-based funds carry non-uniform risk.
SmrtMoney examined performance of 529 plans during the 2008 market crash, and they found some problems.
Some age-based plans targeting high school seniors lost 30% while others gained 4%. How can this be? Aren’t age-based funds supposed to gradually adjust assets over time specifically to avoid such risk?
Well, just like target-date funds, the fund managers of some 529 plans got greedy. Some plans had 50% or more of their assets in stocks! This is way too much risk for a high school senior who will need that money in a year or less. According to Cleveland based financial advisor Scott Snow, an age-based fund for high school seniors should have no more than 20% in stocks.
This should serve as a reminder to all who investing for college in a 529 plan: know where your money is. If your account holds age-based funds, check on the underlying holdings and make sure the risk is in line with the time till graduation.
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