Choosing the Right Plan
Choosing the right 529 plan is not much easier than choosing anything else in financial world. It takes some research, some luck, and the ability to accept some level of risk. The variations in state plans don't make the process any easier. Here are few guidelines that can get you started:
    Researching 529 Plans
    The Kiplinger Web site offers information about the best deals for 529 plans.

    SavingForCollege.com is also a great resource for all kinds of information about 529 plans. It provides state-specific information and links to state programs.

  1. The first thing to do is to look at your own state's plan. There are currently 16 states that offer a tax deduction on 529 contributions, and many that also exempt state tax on the earnings upon withdrawal. Some states may offer matching grants or loan programs. This can make a fairly significant difference and is worth weighing against other state plans that may have lower fees.

  2. The next thing to look at is the manager of the plan. Because the plans haven't been around for very long, you can't really rely on the success record of the plan manager. Look at the investment company's record of dealing with mutual funds and pension plans.

  3. Next, look at the fees the plan charges. Finding a low-cost plan means looking at several possible charges. For instance, some states charge an enrollment fee to open the account, and some also charge annual maintenance fees. Then there is the expense ratio, which is the percentage of fund assets that pays for operating expenses and management fees. This includes 12b-1 fees (basically, fund marketing fees), administrative fees, and all of the other asset-based costs that the fund incurs, with the exception of brokerage costs. Expense ratios often decrease as a fund gathers more dollars from investors, because the funds managers can spread the fixed costs of running the fund over a larger asset base. Expense ratios for 529 plans vary from a low of 0.31 percent to a high of 2.24 percent. Additional costs can also be incurred with plans that are sold by brokers. The commissions currently range from about 3.25 percent to 5 percent, payable upfront! Usually, buying direct eliminates the brokers' fees.

  4. Look at how flexible the plan is. You don't want to be penalized when you want to change beneficiaries or roll the account over to another state's plan. You also don't want to be limited in how the funds can be used. For example, most states allow the funds to be used for all qualified education expenses including the expense of books, housing, etc., as well as graduate school. Look at the amount you will most likely have when your child enters college and make the decision about whether the eligibility of those other expenses will be an issue. For example, if you know you will only have $20,000 in the account and tuition alone is $40,000, then whether the money can be used for housing isn't relevant.

    Another issue is the age limitation. There are a few states that may require your child to use the money prior to a certain age, or that may require that the child be under a certain age in order for you to be able to open an account. There may even be limits to how long the accounts can remain open without any withdrawals.

  5. Investigate the availability and fees related to withdrawing your cash. Although the IRS set a 10-percent fine for withdrawal of funds that are not used for qualified education expenses, plans can charge more than that. Also find out about how easy it is to get your money in the event of an emergency. Sometimes, there are time requirements about how long the money has to stay in the account before it can be withdrawn. If you do have to withdraw a portion of the money for a non-education expense, find out what happens to the rest of the account. Is it closed? Is a fine charged for the entire amount?

  6. Look at the maximums and minimums for contributions. Determine how much you want to have in the account when your child enters college. Make sure the plan allows at least that amount. You also may need a low minimum if you want to start the plan out without a large sum of money.

  7. Find out what happens with the ownership of the account if the account owner dies. Does it go directly to the beneficiary? Or, do you have the right to determine a successor? Also, check to see if you can change beneficiaries with little hassle from either the plan or the current beneficiary.

  8. Finally, check to make sure the plan is well managed and has the resources devoted to it that it needs. Check for program materials that answer all of your questions, good program support staff, and an easily navigated Web site offering quick program information and access to information about your account.