AN INTRODUCTION TO 529 PLANS - PART 4
Is investing in a 529 plan right for me?
Before you start saving specifically for college, you should consider your overall financial situation. Instead of saving for college, you may want to focus on other financial goals like buying a home, saving for retirement, or paying off high interest credit card bills. Remember that you may face penalties or lose benefits if you do not use the money in a 529 account for higher education expenses. If you decide that saving specifically for college is right for you, then the next step is to determine whether investing in a 529 plan is your best college saving option. Investing in a 529 plan is only one of several ways to save for college. Other tax-advantaged ways to save for college include Coverdell education savings accounts, Uniform Gifts to Minors Act (“UGMA”) accounts, Uniform Transfers to Minors Act (“UTMA”) accounts, tax-exempt municipal securities, and savings bonds. Saving for college in a taxable account is another option.
Each college saving option has advantages and disadvantages, and may have a different impact on your eligibility for financial aid, so you should evaluate each option carefully. If you need help determining which options work best for your circumstances, you should consult with your financial professional or tax advisor before you start saving.
"It’s never too early to start thinking about how to pay for college"
What questions should I ask before I invest in a 529 plan?
- Is the plan available directly from the state or plan sponsor?
- What fees are charged by the plan? How much of my investment goes to compensating my broker? Under what circumstances does the plan waive or reduce certain fees?
- What are the plan’s withdrawal restrictions? What types of college expenses are covered by the plan? Which colleges and universities participate in the plan?
- What types of investment options are offered by the plan? How long are contributions held before being invested?
- Does the plan offer special benefits for state residents? Would I be better off investing in my state’s plan or another plan? Does my state’s plan offer tax advantages or other benefits for investment in the plan it sponsors? If my state’s plan charges higher fees than another state’s plan, do the tax advantages or other benefits offered by my state outweigh the benefit of investing in another state’s less expensive plan?
- What limitations apply to the plan? When can an account holder change investment options, switch beneficiaries, or transfer ownership of the account to another account holder?
- Who is the program manager? When does the program manager’s current management contract expire? How has the plan performed in the past?
Where can I find more information?
Offering Circulars for 529 Plans. You can find out more about a particular 529 plan by reading its offering circular. Often called a “disclosure statement,” “disclosure document,” or “program description,” the offering circular will have detailed information about investment options, tax benefits and consequences, fees and expenses, financial aid, limitations, risks, and other specific information relating to the 529 plan. Most 529 plans post their offering circulars on publicly available websites. The National Association of State Treasurers created the College Savings Plan Network which provides links to most 529 plan websites.
Additional Information About Underlying Mutual Funds. You may want to find more about a mutual fund included in a college savings plan investment option. Additional information about a mutual fund is available in its prospectus, statement of additional information, and semiannual and annual report. Offering circulars for college savings plans often indicate how you can obtain these documents from the plan manager for no charge. You can also review these documents on the SEC’s EDGAR database.
Investment Adviser Public Disclosure Website. Many college savings plans’ program managers are registered investment advisers. You can find more about investment advisers through the Investment Adviser Public Disclosure website. On the website, you can search for an investment adviser and view the Form ADV of the adviser. Form ADV contains information about an investment adviser and its business operations as well as disclosure about certain disciplinary events involving the adviser and its key personnel.
Broker-Dealer Public Disclosure Website. You can find more about a broker through the NASD’s National Association of Securities Dealers’ BrokerCheck website. On the website, you can search for any disciplinary sanctions against your broker, as well as information about his or her professional background and registration and licensing status.
Other Online Resources. You can learn more about 529 plans and other college saving options on the NASD’s Smart Saving for College (www.nasd.com go to investor relations, then college savings center) website. The website contains links to other helpful sites, including the College Savings Plan Network (www.collegesavings.org) and the Internal Revenue Service’s comprehensive 82 page Publication 970 (Tax Benefits for Higher Education www.irs.gov, click forms and publications, download forms by publication number, scroll down to publication 970). The NASD’s investor alert, www.nasd.com, (> Investor Information > Investor Alerts > 529 Plans) on 529 plans also provides valuable information.
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