Putting your savings into a 529 college plan

Key Points

As I write this article, oil has hit new highs and the markets have trended back toward the lows of the year. While these are obviously issues to be concerned about, you have relatively little control over the daily ups and downs of the stock market or the current direction of oil prices.

Part of being successful financially in a difficult market environment is focusing on things that you do have control over - your income (to a certain extent), your expenses, and your savings. For your savings, successful investors are the ones who have the discipline to continue investing on a monthly basis, even when things seem to be at their worst.

One of the best vehicles for these savings is 529 college savings plans. 529 plans are primarily operated by each state and designed to help families set aside funds for future college costs. The main benefit of 529 plans is that the government subsidizes some of the cost by giving you tax benefits. Your investments grow tax-deferred, and distributions to pay for the beneficiary's "qualified" college costs are federally tax-free. So the sooner you start, the more time you have to reap the benefits of these tax-deferred and tax-free earnings.

One of the first places you should look is your own state's plan. Why? Because many states also offer an upfront tax deduction for a resident's contributions (note that this is a state tax deduction). For example, Georgia recently removed the income limitations for the state tax deduction and now allows a deduction for the first $2,000 in contributions for Georgia residents. South Carolina, on the other hand, has no dollar or income limitations on the amount of contributions that can be deducted from South Carolina income.

When you take into consideration a 7 percent average state tax rate, it could be said that 529 investments offer an immediate 7 percent return on your money, with virtually no strings attached.

As with all investing decisions, make sure you understand the quality and costs of the investment options available. There is a wide range of costs between plans, especially between adviser-sold and direct-sold plans. According to http://www.savingforcollege.com, the direct-sold plan for South Carolina has total asset-based expenses of .3 percent to .58 percent, while the same adviser-sold plan has total costs for the C share of 1.4 percent to 2.39 percent.

Don't get me wrong: Most investors are much better off working with a trusted adviser who helps you make good decisions over time. But just because you are not writing a check each month does not mean you aren't paying for it.

As far as investment options go, most states have age-based portfolios that automatically adjust the allocation as the beneficiary gets closer to college. Ideally, you contribute to a 529 plan on a monthly basis, just as you do through a retirement plan at work. Grandparents could also get involved in contributing to their grandchild's 529 plan on a monthly or annual basis; some states allow you to contribute as little as $25 to $50 per month.

These plans should be used in the context of an overall savings plan that includes savings for a reserve fund, your retirement, special projects or goals, as well as savings for your education or that of your child. Ideally, there is enough money to cover all of these goals, but do not neglect your own retirement - and make sure you enjoy life as you go along. Most individuals will use 529 savings plans to partially fund college costs along with current earnings from work, scholarships and grants, and student loans.

There is no way to cover all of the nuances of 529 college savings plans in this article, so be sure to talk to a trusted adviser or conduct more research of your own before investing. You will find that the advantages of 529 plans make them well worth considering, and that there is no better time to start investing than today.

The author is a fee-only certified financial planner with Preston & Cleveland Wealth Management LLC (http:// http://www.preston-cleveland.com) in Atlanta and Augusta, Georgia, and a member of the National Association of Personal Financial Advisors. The ideas expressed in this column are his alone and do not represent the views of Medical Economics. If you have a comment or a topic you'd like to see covered here, please e-mail meinvestment@advanstar.com
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