College Savings Plans

February 27, 2014

While the S&P 500 returned 32 percent in 2013, 529 college-savings plans only gained 14 percent, says the Wall Street Journal.

More than 10 million Americans have 529 accounts -- savings plans that help parents generate money for their children's college education.

  • At the end of 2013, there was $203.9 billion in 529 savings plans, with 48 states and Washington, D.C., offering at least one option.
  • Most plans are offered by states directly, though some can be sold by financial advisers. The difference between the two tends to be that the latter generally have higher annual fees.

College savers put their money toward different investments, so not all savers saw the same stock performance last year. For example, conservative investors in Tennessee's plan that invested in a bond-heavy portfolio lost 2 percent in 2013, while investors that took risks on a stock-heavy option made a 34 percent gain.

Financial advisers say that 529 plans remain effective ways to pay for college education, but "you have to be careful how you use it." This, according to Edvisors.com Senior Vice President Mark Kantrowitz, requires a good balance of "fees, state income-tax savings and a strong return on investments."

Those with 529 plans can benefit with tax deductions, though the size of that benefit depends upon the state.

  • Thirty-one states and Washington, D.C., offer income-tax deductions against 529 contributions, and three states offer tax credits. But the amounts vary. Pennsylvania allows a married couple to deduct $28,000 in 529 contributions, while Maine only allows deductions on contributions up to $250. A Pennsylvania couple earning $150,000 making a $3,000 contribution last year would save $270 in state income taxes, while that same couple in Maine would only save $19.88 in taxes.
  • Some states -- Colorado, New Mexico, South Carolina and West Virginia -- measure deductions not based on each year but for each child on the life of the account. South Carolina's deduction of $370,000 is the highest.

While interest in 529s has grown, most people do not use them. Today, 27 percent of parents saving for college use a 529 plan, while 42 percent use savings accounts and certificates of deposit instead. Other alternatives -- such as a Coverdell Education Savings Account, a Uniform Gift to Minors Act account, a Uniform Transfer to Minors Act account, or a Roth IRA are additional options that may grant more control and flexibility to parents trying to save.

Source: Annamaria Andriotis, "How Your College-Savings Plan Measures Up," Wall Street Journal, February 14, 2014.

 

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