“It just doesn’t feel right!” – 529 PlansThursday, August 20th, 2009 by Cass Chappell, CFP®
Arriving on the scene several years ago, 529 savings plans shoulda, coulda, woulda been the greatest thing since sliced bread. There are hundreds of articles on the web and in magazines that deal with the pros and cons of 529 plans. I can’t add anything to that collection of information. However………….
There is one characteristic, unique to 529 plans, that JUST DOESN’T FEEL RIGHT.
Type “529 plan” into Google. Interestingly, as of today, there are 10,800,000 entries for “529 plans” – yet only 1,200,000 for “529 plan”. Why the lack of popularity for the singular? Who knows? … I digress.
There are so many hits in Google because each individual state sponsors their own 529 plan. This makes the 529 landscape muddied at best, and outright confusing at worst. The investment options and fees charged by different states’ plans varies….and if you live in a state that allows at least a partial deduction for contributions, you may HAVE to consider using the plan sponsored by your state…the deduction can be just too valuable to pass up versus investing in a plan of another state which may appeal to you more. In Georgia, donors are allowed to deduct up to $2000 per beneficiary, per year, regardless of income (this was changed in 2007 – there used to be an income limit). Since the top tax bracket in Georgia is 6%, this deduction is worth only $120 per year. The more money one contributes over the $2000 threshold, the less attractive this deduction becomes (in terms of percentage of investment). Particularly if another state’s plan has more appealing fees or investment options. Some states don’t allow a state income tax deduction, thus giving that resident investor the ability to “shop the country” without any lost benefit.
To “shop the country” would require someone to look at almost 50 different plans! Each plan is limited to the investments on that menu. Some menus have 5 choices….some, many more. Each plan has its own fee structure.
Just imagine if your retirement savings was in a “Georgia IRA” that was limited to 10 investment options and was the only provider you could use if you wanted to deduct your contributions! You can’t. Neither can I.
It’s time to fix this. A 529 plan should be just like an IRA. You can open it with any financial institution you choose and fund it any way you wish. It would be SO MUCH EASIER and would be consistent with almost every type of investment account in existence today.