college

What's new in college savings plans

Lower fees

An equally welcome development has been the slashing of 529 fees as competition has heated up. Yet 529s remain more expensive than other types of investments because of the extra level of management and marketing, Hurley says.

For instance, the Vanguard Total Stock Market Index Fund has an expense ratio of annual operating expenses versus the fund's net assets of just 0.15 percent, one of the lowest around. But the corresponding 529 plan, which invests solely in the exact same mutual fund, has a total expense ratio of 0.5 percent.

"There's still room for fees to come down," Hurley says.

Fee structures are complex, too, he says. Before choosing a 529 plan, compare fees and understand what they include. A good place to start is at Savingforcollege.com.

Changing your asset allocation

Many 529 investors have been disappointed by their plan's performance lately. If you think current stock prices represent a buying opportunity, you might want to shift your 529 portfolio to favor stocks. On the other hand, if recent volatility has turned you off stocks, you might prefer to move to safer, more conservative instruments such as bonds or bank CDs.

To make such changes, all you have to do is contact your broker or the plan's sponsor -- Fidelity, Vanguard and others. There's no penalty, as long as you don't do it too often.

"The IRS allows changes to your 529 investment mix one time per year, but for 2009 it's allowing two changes," says Kara L. Harmon, a financial consultant at Moneta Group in Clayton, Mo.

A rules change in 2009 and 2010 allows computer purchases as qualified expenses for higher education, says Will Hepburn, president of Hepburn Capital Management in Prescott, Ariz. That means 529 funds can be withdrawn tax-free to purchase PCs and related accessories.

Switching 529 plans

If you want to switch funds from one state's 529 program to another state's 529 program, known as a rollover, you can do it once every 12 months, Hurley says. "When setting up your new plan, simply write on the application that you want the funds rolled over from a different 529 plan," he says.

Alternatively, you can withdraw funds from one 529 and deposit them into another, but you have to do it quickly to avoid paying taxes as well as a 10-percent penalty for unqualified withdrawals. You must redistribute the funds to a new plan within 60 days to avoid it, Hurley says.

You also can change your 529 plan every time you change the beneficiary, even if it's less than 12 months since your last 529 rollover. The rule on changing beneficiaries is once every calendar year, provided the new beneficiary is a sibling, cousin, parent or child of the previous one, says Carl.

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If the new beneficiary is the child of the former beneficiary, the transfer may be considered a "gift," which would be taxable if it's worth more than $13,000, Carl says.

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