Wednesday, September 28, 2005

Caveat Saver: Watch Your Back on 529 Savings Plans

College savings plans, unlike retirement plans, did not qualify for tax-free distribution for those affected by Katrina. As the Forbes article points out; however, this is hardly the biggest landmine those attracted by the tax benefits of Section 529 accounts. Present investment in such plans involves over 7.5 million accounts and $72 billion.

Major concerns include poor disclosure, overly aggressive sales pitches and fees both high and hidden. Investments are equally split between low-cost investment houses such as TIAA-CREF and Vanguard and broker houses with higher fees such as Edward Jones and Charles Schwab. Analysts complain that it is virtually impossible to compare college savings plans. The Municipal Securities Rulemaking Board (MSRB), associated with the SEC, has proposed rules requiring more disclosure of alternatives, but trade organizations such as the Securities Industry Association, consider the MSRB proposals unworkable. At present, since the securities are considered to be governmental rather than private, the SEC can only go after fraudulent sales pitches, not those that are merely misleading or overly zealous.

Certainly it is understandable that parents would want to be able to finance at least part of their child[ren]'s education; likewise it is prudent to plan ahead and to take advantage of legitimate tax breaks. Given the "wild West" nature of these savings plans, however, I recommend either using an alternative (usually taxable) vehicle or using a low-cost investment organization that one presently deals with and trusts.

3 Comments:

Blogger thc said...

I've never quite understood all the attention 529s get. They are usually expensive, the rules are a mess, your investment alternatives are limited...shall I go on? Their best use is for grandparents to move a lot of money out of their estates (provided a healthy number of grandkids).

9:40 PM  
Blogger Dan Meyer said...

Thanks for your insight. Yours is offically the first non-spam comment received by this blog.

6:14 AM  
Blogger Chrees said...

It can make good sense in certain circumstances.
My wife is self-employed and set up a 529 for our son (and will do the same for the one on the way). As long as she follows certain guidelines, she can deduct the investment as a business expense.

2:50 PM  

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