EDUCATION

Don’t overlook 529 college savings plans

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You may have heard about the new push to get families to invest in 529 college savings plans. In which case, you might be wondering exactly what they are.

Though still not widely used, 529 savings plans got a fresh endorsement this month when the Obama administration urged states to make it easier for middle-class families to enroll in them. The White House issued a report stating only 5 percent currently do so, compared to a third of high-income families.

“A lot of people aren’t even aware they exist,” said Kathy Hankard, owner of Fiscal Fitness, a financial consulting firm in Verona, Wis. “If they do, there are a lot of misconceptions about how they work.”

Put simply, a 529 savings plan lets families invest for college in much the same way as 401(k) plans let families save for retirement. Distributions are tax free, but must be used for educational costs such as tuition, books and room and board.

The market’s rollercoaster performance in the past year could also be keeping enrollment down. The number of new 529 savings accounts opened this year is expected to fall more than 20 percent to 790,000, according to the Financial Research Corp. Families are likely to scale back investments, too. In the first quarter of the year, the average size of new accounts fell by 13 percent compared to a year earlier.

Still, 529 plans come with significant tax benefits and can help savings keep up with rising tuition costs. The average yearly tuition and fees is now $6,585 for a public university and $25,143 for a private school, according to The College Board.

Here’s a rundown on what you need to know about 529 plans.

• Size up your options. New York offers its own college savings plan ( www.nysaves.com ), which allows you to deduct contributions against your state income tax. Next, start winnowing the list is to identify the features you want. For example, if you’re intimidated by the thought of managing your investments, you might want an age-based plan.

As with target-date retirement funds, age-based 529 plans automatically shift the mix of assets to reduce risk as enrollment age approaches.

Of course, asset mixes can still vary significantly among plans. So compare the portfolios -you may find one is more conservative and in line with your comfort level.

You might also want to look for a plan that’s tied to an index, such as the Standard & Poor’s 500, since such plans usually come with lower fees. In fact, providing more indexed, age-based funds is among the Obama administration’s recommendations to boost participation in 529 plans.

• Know the pitfalls. A natural concern about 529 plans is that you won’t need all—or any — of the money you save for college.

Money can still be distributed to the beneficiary or account owner, of course, but you’ll need to pay income tax plus a 10 percent penalty on the earnings.

The penalty can be waived for select reasons, such as the winning of a scholarship. It won’t be waived if your child simply decides on a different path and doesn’t go to college. But you can always change the beneficiary named on the plan.

“Maybe there’s a younger sibling heading to college, or even yourself,” Hankard said.

Another concern might be that a 529 plan will thwart your child’s ability to win financial aid. But so long as the account is in the parent’s name, the impact is minimal when applying for aid from public schools.

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