April 20, 2015
While a 529 plan is commonly considered the “best college savings vehicle”, this option does have some downsides.
Reasons to use a 529 plan:
Investments in 529 plans grow tax-deferred and withdrawals are tax-free when used for qualified college expenses. Also, most states offer income tax deductions on contributions. Even if funds are not needed for the intended beneficiary, there are other options that let the owner escape tax penalties.
Reasons against using a 529 plan:
• The earnings portion of withdrawals not used for qualified expenses is subject to ordinary income taxes and a 10% penalty.
• It’s not for the short term.
… one instance where the benefits of a 529 college-savings plan may not have time to accrue is for those that are looking at very short investment horizons—such as one year—before beginning to take withdrawals. The benefit of tax-free growth is very limited over such a short period of time in low-return, no-risk investments, and could be offset by investment expenses or plan fees in the short run.
• Requires extra research.
Plans will vary from state to state, which is a little more challenging for families. Therefore, you need to do your due diligence on the sales charges, fees, and investment choices by the plan administrator.
• Limited investment options and higher fees.
• Restrictions in moving funds between accounts.
Some families may simply prefer to maintain more flexibility and control over their college savings, and therefore are willing to forego the tax benefits that 529 plans offer. There are no absolute right or wrong choices since investing is a highly personalized undertaking. Here’s a good resource for learning more about 529 plans:
Understanding 529 Plans
“The Experts: Are 529 Plans the Right Choice for All Families Saving to Send Their Kids to College?”, Wall Street Journal, June 5, 2013.
April 23, 2014
Only 29% of families choose 529 plans for college savings.
A 529 plan is the “best college savings vehicle”.
… By far the most popular college savings vehicle is the general savings account (nearly half of families with children under 18 use this to save for college). But Foss says that the best college savings vehicle is the 529 plan (less than one-third of parents are using this to save). “There aren’t many reasons not to use it,” she says. One of the major reasons these plans are better than general savings accounts is that your investments in 529 plans grow tax-deferred and distributions come out tax-free on the federal level; plus 34 states and Washington, D.C. offer state income-tax deductions, so there’s a “double tax advantage” in these cases.
Furthermore, you can transfer the funds in these accounts to another child if one of your kids opts out of school and 529 plans are treated favorably with colleges’ financial aid offices. General savings accounts can’t compete with the benefits of the 529 when it comes to saving for college, Foss says. However, if you do not use the 529 plan for college expenses, you will likely have to pay a 10% penalty and income tax on the earnings when you withdraw the money.
Related: What you may not know about 529 plans (Cost of College)
October 25, 2013
Economics professor Mark J. Perry shared some investment facts on the occasion of “Eugene Fama winning the Nobel Prize of Economics, largely for his path-breaking academic finance research on market efficiency that ultimately led to the introduction of low-cost mutual funds by Vanguard and others that pursue a passive investment strategy of buying and holding portfolios of stocks that track an index like the S&P 500″.
Here’s one fact that should get every investor’s attention.
Empirical evidence shows that passively managed index funds outperform almost all actively managed funds over long holding periods, adjusted for risk, taxes and expenses.
I used to work for a mutual fund company with a winning fund manager who consistently outperformed the market over more than 30 years, but he was the exception. These days I’m a fan of index funds for most of my investing.