Families may think 529 college savings plans are only for investment-savvy, affluent parents. But these state-sponsored, tax-advantaged education plans are designed to benefit any income level. And these days, more middle – class families are investing their money in them, according to Strategic Insight, a research and consulting firm.
But getting started can be a hurdle. According to financial experts, families stall for several reasons, including living paycheck to paycheck, having trouble buckling down on distant savings goals and not knowing how to decide on a plan. But if you plan to help pay for college, as 88 percent of families do, according to the College Savings Foundation, saving sooner is better than later. Compound interest needs time to work.
According to Young Boozer, chair of College Savings Plans Network and state treasurer of Alabama, state plan administrators recognize that families feel overwhelmed, and plans have been refined to be simpler and more understandable, trending toward more direct-sold plans, which have lower fee structures than advisor-sold plans.
Discover the pros and cons of [college savings plans.]
Direct-sold plans are those purchased directly through a plan manager, not an advisor, and in most cases by the company contracted by each state, such as Vanguard, Fidelity or T. Rowe Price. The network’s website allows you to compare plans, with links to every state’s program.
To look at performance, take a tour through Savingforcollege.com, which allows you to compare plan features and includes analysis of best performers. Morningstar, a Chicago-based investment research firm, also provides 529 performance analysis in its saving for college section.
It’s easy to feel overwhelmed by investment-speak. To find a direct-sold plan, experts say to consider the following.
— Start close to home: Many states offer tax incentives, matching grants or other perks, so find out if your home-state plan is a good option.
“Many times that tax benefit is useful enough that it makes sense for people to choose their state’s plan,” says Char Gross, principal and head of Vanguard’s Education Savings Group. Some states offer more than one plan, and Gross suggests considering the investment options and looking for a low fee structure to guide your decision-making.
But do some research to determine which plan stands out. If your state’s plan doesn’t offer a tax deduction or doesn’t stack up well against higher-performing out-of-state plans, look beyond your state. Not all plans are created equal.
— Analyze required fees: Paying unnecessary maintenance fees can chew up growth, Boozer says. Look for fees well under 1 percent — even 0.5 percent — but weigh the fees against the tax deduction and the length of time you’ll own the plan. Take a look at Morningstar’s year-end summary of top-shelf plans and compare their fees to the plan you’re considering, he suggests.
Take these [four steps before opening a 529 plan.]
— Look for a low minimum investment: Plans are open to families of all income levels, and many can be opened with $25 or less. Additionally, many plans allow you to set up an automatic minimum payment from your paycheck.
The auto-pay feature eliminates the decision of whether to contribute, so saving becomes a habit. Also, look for whether an automatic payment plan reduces or waives annual fees, says Roger Young, senior financial advisor at investment management firm T. Rowe Price.
— Opt for simplicity: These days, many direct plans offer age-based investments, typically in index funds, to minimize market risk as much as possible. What that means is that money is invested in more aggressive funds when children are young and automatically moved into more conservative funds as they get closer to college. Index funds are broadly diversified groups of funds with lower fees and less risk and require little management.
“The automatic nature of knowing money is being reallocated appropriately over time helps take away some of the friction of decision-making,” Gross says. Plans do allow you to move money twice a year, but Boozer says most families rarely move their money once they make a decision on a plan.
“For people who don’t feel comfortable making investment decisions on their own, age-based plans can be a great way to go,” Young says. But it’s useful to analyze performance even if you’re a hands-off investor. Savingforcollege.com lists plan performance over time — one, three, five and 10 years — and provides a good starting point.
Learn what [investment options there are in 529 plans.]
— Don’t overthink savings goals: For every family, how much to save will be calibrated to income and personal circumstances, Young says. Choose what’s best for you. Any amount saved is money not borrowed. To get started, consider opening just one plan , even if you have more than one child.
The long-term goal is to save for each child, but kids won’t lose out if you start with one plan. You can enroll online at one of the comparison sites or go directly to your state ‘s site. Plan managers are also happy to answer questions by phone.
Trying to save for college? Get tips and more in the U.S. News 529 College Savings Plans center.
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How to Choose a 529 Plan on Your Own originally appeared on usnews.com
