529 college savings plans are a popular investment vehicle for people who want to set aside money for college for either themselves, their children, or for some other eligible beneficiary. These plans carry significant tax advantages for plan holders while allowing participants to save toward college or to prepay tuition, depending on the plan’s stipulations. 529 college plans can be used for most college expenses including tuition and books as well as for room and board if the student attends school at least half time.
Plans Available All Across America
Every state and the District of Columbia has 529 college savings plans, with many welcoming out of state contributors. This means that if a plan in one state is superior to a plan offered in another state, investors should weigh their options. However, by not investing in your own state’s plan you could lose important state tax deduction benefits. Regardless, all plans allow you to use these funds at eligible college and universities throughout the United States as well as for select foreign institutions.
The investment-research firm, Morningstar, Inc., recently ranked all of the 529 plans, compiling a list of the best and worst plans for investors. Morningstar takes into consideration a number of factors when rating these plans including investment choices, return on investment, management, and fees when determining their rankings. This is the sixth consecutive year that Morningstar has weighed in; the firm’s findings are well respected by members of the financial community.
Not A Good Year For 529 College Savings Plans
As you might imagine, 2008 was not a good year for 529 college savings plans as most lost money. Greg Brown, Morningstar mutual fund analyst and author of the study, shared the following observations regarding last year’s performance, “2008 was a terrible year for 529 plan investors. In recent years, the industry made strides by lowering fees, improving investment options, and closing down poorly structured plans. Last year, however, we saw too many plans that were overly aggressive with their investment strategies as students approached college, and plans that stayed loyal to strategies that just weren’t working.”
Morningstar favors those plans which have low cost and offer age-based portfolios meaning as a student nears college age, investors can direct their investment into funds which are less risky. Utah’s 529 college savings plan was rated among the best while New Jersey was rated among the worst, primarily for their aged-based investing options. Ohio, Indiana and a pair of Virginia plans joined Utah on the Best 529 College Savings Plans while two Nebraska plans, an alternate Ohio plan and Montana joined New Jersey on the Worst 529 College Savings Plans list. Several states have at least two plans, hence the reason why Ohio was named on both lists.
“Investors should carefully examine their options before choosing a 529 plan. For example, states usually offer tax deductions for in-state residents, but the value of that tax incentive might be outweighed by other factors. The in-state plan might have high expenses, or a poorly constructed portfolio,” Brown said. “The broad disparity of 529 plan performance in 2008 illustrates how important it is for investors to do their homework before choosing a plan.”
More Information From Morningstar
For Morningstar’s complete 529 plan study, please visit: http://www.morningstar.com/goto/529Plans
For additional resources on 529 plans, please visit: http://www.morningstar.com/goto/529Resources
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