How to Evaluate 529 Plans

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The type of college students should attend—public or private, nearby or faraway, liberal arts or pre-professional—is something these students should discuss with their parents. But whatever they choose, there's little debate that a 529 Savings Plan is one of the best ways to finance higher education. Indeed, approximately 10.3 million individuals have established 529 plans, and these accounts were holding $204 billion in assets at year-end 2013. Accountants should familiarize themselves with the details to better advise their clients.

A 529 plan allows the college saver to set up an account for a student/beneficiary, with the earnings from the account accruing tax-free. Withdrawals from the account are not subject to tax liability as long as the money is used for qualified expenses such as tuition and room/board. Distributions not used for college expenses are considered income and subject to taxation. It is noteworthy that the account owner may change the beneficiary at any time without tax consequences. An account set up for a beneficiary who decides to forgo the college experience, or gets a scholarship that covers all costs, may be used for another family member instead.

While all 529 plans—available in 48 states—feature the same tax-free accumulation and distribution characteristics, there are differences among plans that are worth examining. Some states reward investors for using its vehicle, although these benefits typically go only to state residents. For example, denizens of New York who contribute to the N.Y. 529 plan can lower their state adjusted gross income by the amount of the deposit, with reductions limited to $10,000 for a married couple and $5,000 for a single taxpayer. Thus a married couple in the 6.45 percent tax bracket (taxable income between $41,000 and $154,000) who contribute $10,000 to a New York-based 529 plan will enjoy a $645 decrease in their state tax liability.

Parents and their advisors should consider their options carefully. Many states offer multiple options as well as special tax breaks for residents, as noted above. But generally 529 plans are open to out-of-state residents, so investors shouldn't feel bound to their own state.

Let's again take New York as an example. It offers two 529 plans that qualify for tax benefits. One features mutual funds managed by Vanguard and is sold to investors directly, while the other uses funds managed by JP Morgan and is purchased through an investment advisor. The 529 plan sponsored by JP Morgan is more costly because of a sales commission paid to brokers who market the plans. The choice of plan depends on whether or not the saver needs the services of a financial advisor. The investment professional who successfully navigates the fluctuations of the capital markets and delivers a positive investment experience is of great benefit and worth the added expense of the JP Morgan 529 savings plan.

The investment results of 2013 reinforce the importance of carefully assessing the options when selecting a 529 plan, as plans with heavy bond allocations did not fare as well as those with significant equity positions. Logic would suggest that as most states offer their own particular 529 plan, investment choices would vary, as directed by the specific manager employed. It is common for a state/investment manager to offer an age-based option that becomes more conservative as the child ages. Savers may not be aware, however, that fund managers assign different allocations to stock and bonds for similar age-based options.

For example, Vanguard's N.Y. 529 plan has three age-based portfolios for beneficiaries ages 16-18, with only the "aggressive" of these investing in equities, with a 25 percent weighting. JP Morgan's N.Y. 529 plan has a similar age-based portfolio (15-17) which keeps 33 percent of the portfolio in stocks. No matter what state they're working with, parents and their advisors must perform the necessary due diligence when selecting a 529 plan, and choose the one that offers the portfolio that best meets their needs and risk appetite.

Not the Only Game in Town
Parents can consider other savings vehicles as well, such as a Coverdell Education Savings Account. Money in Coverdell accounts can be used for expenses for primary as well as a secondary education, and the accounts permit investors to make investment changes as often as they like; 529 savers are limited to one adjustment per year. Coverdell investors are also allowed to invest their money in individual stock issues. Drawbacks to the Coverdell plans include a maximum annual deposit of $2,000, and bestowals cannot be made once the beneficiary turns 18.

The parent who graciously shoulders the burden of paying for a college education must today contend with tuition increasing at a rate five times that of the consumer price index, and overall expenses that may exceed $50,000 annually for a private university. Whatever program is selected, the benefactor and beneficiary are best served by a saving and investing plan begun when the child is very young, with contribution levels escalating as financial resources will allow.

For additional help, parents and advisors can turn to, which was founded by Joe Hurley, a New York CPA.

About the author:
Daniel G. Mazzola, CPA, CFA, is an investment advisory representative with American Portfolios Advisors Inc. He is a Chartered Financial Analyst, Certified Public Accountant, and Certified Financial Planner.

About Daniel Mazzola


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