|04-20-2010, 07:11 PM||#2|
Join Date: Mar 2007
Location: St. Loser, MO
Casino cash: $5774
I just read this article yesterday on 529s. There's some good info in it: http://www.stltoday.com/stltoday/bus...7?OpenDocument
529 plans are no-brainer for parents with kids
ST. LOUIS POST-DISPATCH
Sunday, Apr. 18 2010
The "529" college savings plan is the best invention for parents since the
pacifier. Both buy peace of mind for Mom and Pop.
Start a tax-free 529 plan when the kid is young, make regular contributions,
and you can be reasonably sure that you'll be able to afford college when the
Not Washington University perhaps, where the tuition, room and board run
$58,788 per year; but certainly the University of Missouri-St. Louis at roughly
All states, including Missouri and Illinois, sponsor 529 plans, which draw
their nickname from the number of a provision in the tax code. They're
structured a bit like 401(k) retirement plans, offering a mix of stock, bond
and stable-value mutual funds. You can start saving with as little as $25.
The earnings on plan investments are free from federal income taxes, as long as
they are used for higher education. They're also exempt from state income taxes
in Missouri and Illinois.
Tax breaks are what make this a great deal. If you invest $1,000 when a child
is born, a 529 plan will likely yield about $4,000 by his 18th birthday. Put
the same amount in a taxable account and you'll have only about $2,600 after
taxes. That's assuming an 8 percent annual return, about what you might expect
from a moderate mix of stocks and bonds.
Missouri and Illinois add an extra kick: a deduction on state income taxes for
contributions. That's a quick return of up to 6 percent in Missouri and 3
percent in Illinois.
Missouri allows the deduction for all state plans. Illinois allows it only for
its own plan, called Bright Start, according to the state Treasurer's office.
So, the question is not, "Should I start a 529 plan for my baby genius?"
Instead, it's "Which of 50-some plans do I pick?"
States offer two basic varieties: those sold through brokers and those sold
directly to the public. "The direct-sold plans are much better. The brokers get
a huge commission," says Mark Kantrowitz, publisher of the well-respected
Finaid.org financial aid website.
The Illinois' Bright Start's broker-sold version carries commissions of 3.5
percent. It's 3.75 to 5.5 percent for the Missouri Saving for Tuition program,
nicknamed MOST. The mutual funds within broker plans also tend to have higher
expenses than the direct-sold versions.
The Financial Industry Regulatory Authority, the official cop for the brokerage
business, last year put out an investor alert about 529 sales tactics. "Some
brokerage firms and advisers offer only one or a very limited number of 529
plans," FINRA said. That means customers may miss out on the best plans with
lowest costs, and those offering state tax benefits.
Your broker might argue that he, being a whiz at finance, will be able to spot
absolutely the best state plan for you. Don't bet on it.
We're talking about an investment time horizon of five, ten or 18 years here.
Very few brokers or fund managers can beat the market averages over such long
Besides, the direct-sold plans offer their own form of professional management.
Most offer age-adjusted options. They start out with an aggressive mix of
stocks when the client is a baby, then gradually pull back into less-risky bond
and money funds as tuition bills approach.
Do-it-yourselfers can usually pick among several stock, bond and stable value
Some plans do pick rotten funds. Illinois' Bright Start "had a good deal of
exposure to some of the bond world's worst offenders in 2008,'" says an
evaluation from the Morningstar mutual fund analysis company.
Bright Start offered Oppenheimer bond funds that took steep losses in the 2008
market crash. The plan's age-based option for 15- to 17-year-olds dropped 22
percent — not something that should happen when tuition bills are a year away.
Its "active fixed-income" option — supposedly a low risk investment — was
entirely in Oppenheimer's Core Plus bond fund and lost a third of its value in
2008, says Morningstar.
Bright Star has since added bond options from the Vanguard and American Century
You can find rankings and good side-by-side comparisons of 529 plans at
www.savingforcollege.com. Missouri's plan ranks 30th in one-year performance,
and ninth in three-year performance. Illinois' plan is 41st in one-year
performance. It has no three-year rank because its offerings changed within
The direct-sale version of Missouri MOST gets reasonably good marks from
Morningstar. "The plan is stocked full of low-cost tried and true Vanguard
index funds, as well as a few actively-managed funds from American Century,"
says the analysis.
However, the American Century Funds' expense ratios are on the high side,
taking 0.9 to 1.5 percent of assets each year. The Vanguard funds charge 0.62
Morningstar recommends cheaper Vanguard index plans offered by Nevada and Ohio.
Cheapness is a big deal in picking a 529 plan, says Laura Lutton, editorial
director in Morningstar's mutual fund research group. Lutton lives in Illinois,
but she picked the Utah 529 plan when her child was born five years ago, giving
up the Illinois state tax deduction. "You weigh whether the lower expense ratio
makes up for the tax saving you'd receive," she says.
Illinois state income tax deduction for 529 contributions is limited to $10,000
per individuals and $20,000 per couple. The deduction is limited to Bright
Start and Illinois pre-paid tuition plans.
Missouri's limits are $8,000 per year and $16,000 per couple and apply to any
If you contribute to Missouri's MOST plan, you have to keep the money in for a
year to earn the deduction. A bill in the legislature would repeal that
requirement for MOST.
For more information on MOST, call 888-414-6678. On Bright Start, call
|04-20-2010, 07:52 PM||#3|
Join Date: Mar 2005
Location: kansas, hiawatha
Casino cash: $5000
They're good, but made out to be better than they are. Using a mutual fund company is the only way you can gain access to one. You aren't however limited to the 529 plan of your state (at least in KS) any states plan offers the same benefits.
|04-20-2010, 08:00 PM||#4|
Join Date: Jan 2004
Casino cash: $15217
The problem with the 529 plan is can only be used on education, so if your kid gets a free ride scholarship or otherwise, the 529 becomes useless.
Look into a One-Time Gift to Minor account, it accrues the same and be used for any purpose as long as it is presented to the intended child by a certain age.
|04-20-2010, 08:52 PM||#6|
Join Date: Mar 2005
Location: kansas, hiawatha
Casino cash: $5000
I agree that ugtma accounts are a good way to go. A main difference is with a 529 you will always maintain control of the account whereas with a custodial account (gift to minors) your child will become the owner of the account at 21.