| How to research a 529 plan |
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That's not the kind of advice people want to pay for.
Tough to track
For their part, even good conscientious brokers don't really want
to stay abreast of the intricate details of every 529 plan out there.
For what? A $400 commission on a $10,000 investment? That's a lot
to expect from anyone.
Under a new proposal by the regulatory agency that
oversees 529 plans, brokers will be required to undergo a "suitability
analysis" when recommending a 529 plan to a client rather than
a more comprehensive "comparative analysis" that had been
proposed earlier in the year, according to Joe Hurley. Brokers are
also supposed to advise their clients that they might miss out on
favorable state tax deductions if they invest in a plan outside
of their state. Finally, they're supposed to tell their clients
to seek advice from a legal or tax professional. So why hire a broker
if you need to hire a lawyer and an accountant, too?
This is why you should consider bypassing these experts
and just doing your own suitability analysis. Unless you analyze
every plan out there, it shouldn't take more than a couple of hours
to do your own research. I'll give you the links
to some excellent sources of information (including some from Bankrate)
as well as hints on how to winnow the options so you can choose
from a short list of less expensive plans that are marketed directly
to the public.
Tax considerations
At the federal level, you use after-tax dollars to invest in 529
plans, but the funds grow tax-deferred and can be distributed tax-free
if used for qualified education expenses. If they're not used for
education purposes, the earnings are taxed plus a 10 percent penalty
applies, with some exceptions.
More than half of the states offer a state tax deduction
to taxpayers who contribute to their own state's 529 plan. A handful
of plans (Louisiana, Maine, Michigan, Minnesota and Rhode Island)
even offer matching contributions. That's why it's important to
check out the plan in your home state first to learn of any benefits
there.
While limitations on deductions apply in most
cases, four states (Colorado, New Mexico, South Carolina and West
Virginia) offer an unlimited tax deduction.
Currently, states don't offer a deduction for
contributions made to out-of-state plans, though legislation has
been introduced in several states that would either create a new
deduction or extend the current deduction to 529 plans outside their
states.
Meanwhile, three plans -- those in Illinois
and Pennsylvania, for starters -- actually penalize investors who
stray outside the state by taxing earnings on outside plans. Alabama,
which has taxed earnings on all plans including its own, just passed
a law that will make its state plan tax free to Alabama residents
effective May 1. But it will continue to tax earnings from
out-of-state plans.
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