529 plans worth reviewing

PERSONAL FINANCE

April 03, 2007|By EILEEN AMBROSE

Maybe you've been on the fence about investing in a 529 college savings plan. You heard about high fees and how the tax benefits were going to disappear in a few years. And there are so many plans. Who has the time and know-how to choose one?

It may be time to get off that fence.

Fees have generally come down. Congress made the college plans' tax breaks permanent. And families now have a new tool designed to take the guesswork out of selecting a plan.

With a college savings plan, you invest money in mutual funds where the cash grows tax-deferred. Earnings won't be subject to tax later if the money is used to pay for college.

The standard advice for families is to look at the home-state plan first. That hasn't changed. And Marylanders have even more reasons to look in their own backyard.

Morningstar Inc. recently named the Maryland College Investment Plan managed by Baltimore-based T. Rowe Price Associates as one of the five best. The reason: The plan eliminated a $75 enrollment fee and cut its management fee. This, along with a state tax deduction for contributions, allowed Maryland's plan to edge out Alaska's, which is also managed by Price, Morningstar says.

Morningstar's list of the best also includes the Colorado Scholars Choice, managed by another Baltimore player, Legg Mason. Legg overhauled the Colorado plan after it acquired manager Salomon Smith Barney in 2005. Giving investors access to Legg's fund managers, including Bill Miller, only improves the plan, Morningstar says.

Maryland's plan is sold directly to investors; Colorado's plan is sold through brokers.

Joseph Hurley, founder of Savingforcollege.com, says broker-sold plans tend to be more expensive because you're paying for a broker's advice.

The trend across the country has been falling fees, especially among larger plans.

"It's competition," Hurley says. With investment companies vying to manage college savings plans, states have been able to negotiate more favorable terms when management contracts come up for bid. That's what happened in Maryland.

States also have reduced fees by adding more low-cost index funds to plans, Hurley says.

Last year "was a watershed year for 529 plans," says Jacqueline Williams, chair of the College Savings Plans Network.

One reason, she says, is that the Pension Protection Act made the tax breaks for 529 plans permanent. Tax-free withdrawals were set to expire after 2010. Families worried about this and the growth of plan assets started to stall a bit, Williams says.

Once Congress guaranteed future tax breaks, plans noticed an uptick in contributions, Williams says. By the end of last year, 529 plans had more than $100 billion in assets, up from $88 billion in August when the pension act passed.

There are nearly 100 college savings plans and prepaid tuition plans. The College Savings network last week updated its Web site, www.collegesavings.org, so families can compare all the plans, including their fees. Hurley's Web site, www.savingforcollege.com, also offers plan comparisons.

Readers' tip

Last week's article on the habits of good savers, brought this tip from Cathy and John of Ellicott City:

"When we pay off a high-ticket item like a car, we set up an account and save the amount that we were paying for that item. We are then able to use this later toward the new car when we purchase it. Likewise when we pay off our mortgage this year, we will put that amount into a savings account for future use. As you say, when you have it already taken out you do not miss it."

Questions? Comments? Write personal.finance@baltsun.com.

MORE AMBROSE Find Eileen Ambrose's column archive at baltimoresun.com/ambrose

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