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Setting aside money for college education can be a complex endeavor for many families. But some of today’s options are much better than those of yesteryear. In this article, we examine the cream of the crop of tax-sheltered 529 savings plans.
We’ve written before about various tax-advantaged plans to help
parents and grandparents save money for college costs. One important
type of plan is called the 529, which is operated by all states. Most
are open to U.S. families no matter where they live, so geography is
not a major issue. (Some states offer prepaid tuition contracts for
their schools as well.)
I see four important attractions of 529 plans. First, the growth of the investments isn’t subject to federal tax if it’s used for college costs. (This tax exemption expires in 2010; distributions of earnings made after that are taxable to the beneficiary.) Second, the donor retains control of the investments and withdrawals. Third, the paperwork is very simple. Fourth, the amounts you can contribute are substantial, without age or income restrictions. Some accept contributions up to $265,620 per beneficiary. The plans vary widely from state to state. Some have relatively few good investment options, and others charge investors too much in fees and expenses. But last fall, parents and grandparents got a break when the state of West Virginia and Hartford Life launched a new 529 program that uses funds from Dimensional Fund Advisors (DFA). We use these funds exclusively in the majority of accounts that we manage for clients, and we believe in them strongly.
For details on why, see an article on our Web site called “ The Best Mutual Funds in the World.” In a nutshell, these funds offer world-class asset allocation at very low cost.
Total annual expenses in the West Virginia plan, which is called “Smart529 Select,” range from 0.88 percent to 1.16 percent, plus a $25 annual account maintenance fee. That fee is waived for accounts with $25,000 or more, for all accounts of West Virginia residents and for accounts with automatic monthly investments of $50 or more.
When you enroll in the plan, you can choose from 10 "static" portfolios ranging from 100 percent equity to 100 percent one-year fixed income. The all-equity portfolio invests in DFA funds in eight asset classes: U.S. large-cap, U.S. large-cap value, U.S. micro-cap, U.S. small-cap value, international value, international small-cap and international small-cap value and emerging markets value. Fixed-income parts of the portfolios are invested in DFA’s five-year and two-year global funds and its one-year fund.
Investors can also choose an age-based portfolio that gradually shifts assets from equity funds to fixed-income funds as the child ages, : 10 percent for ages 4 to 6, 20 percent for ages 7 to 9, 35 percent for ages 10 to 12, and so on until fixed-income funds make up 80 percent of the portfolio at age 19 and above. For parents who want a set-it-and-forget-it savings plan, the age-based portfolio is a pretty good option.
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