Photo: Robert S Donovan
Originally designed to encourage college savings, 529 plans became a broken promise for many. Sponsored by states and colleges, 529s promise investment gains with no federal or state taxes when earmarked for education. (Some are tricky, so get tax advice before investing.)
Typically, states offer deductions to in-state investors, putting more money in savers’ pockets for future expenses. But this benefit may not be enough to overcome disadvantages of poorly performing accounts.
The PROS: A 529 plan offers one-stop shopping for novice investors. Most provide age-appropriate portfolios that become more conservative the closer your student gets to freshman year, and most can be rolled over to other state plans. Beneficiaries can be changed. And a state’s name behind the plan provides psychological security for investing parents and grandparents.
The CONS: Unexpected performance. From 2005, most plans lost money, or their net returns fell below inflation. Plans with principle “guarantees” include fees that eroded simple-interest gains. Plans invest in stocks, directed by people who consistently underperform the market. (When markets tank, your savings tank as well.) And, too much 529 savings prevents students from obtaining financial aid.
If you live in no-tax states, there is little incentive for 529 plans. Those states are: Alaska, Florida, Nevada. North Dakota, Texas, Washington and Wyoming (New Hampshire and Tennessee aren’t bad either.)
Consider other college savings ideas, including Roth IRAs and family investments out of the child’s name.
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