Is it time to switch your col­lege sav­ings plan?

Houston Chronicle - - PERSONAL FINANCE - By Liz We­ston

Col­lege sav­ings plans are a great way to save for ed­u­ca­tion. But not all col­lege sav­ings plans are great.

Most state-spon­sored 529 col­lege sav­ings plans, which al­low users to in­vest in a tax-ad­van­taged ac­count for fu­ture ed­u­ca­tion costs, have im­proved sig­nif­i­cantly in re­cent years, says Made­line Hume, an­a­lyst for mul­ti­as­set and al­ter­na­tive strate­gies at in­vest­ment re­search firm Morn­ingstar. Plans have low­ered fees, im­proved in­vest­ment op­tions and smoothed in­vest­ment “glide paths” to re­duce risk.

But not ev­ery plan is keep­ing up. Morn­ingstar re­cently down­graded eight state plans and ad­vised most savers to avoid five oth­ers, of­ten for ex­ces­sive costs.

If you’re sav­ing for a child’s ed­u­ca­tion in a 529 plan, or want to start, it’s a good time to re­view your op­tions be­cause there may now be a bet­ter choice.

A smoother land­ing

Most of the money saved in 529 plans is in­vested in ageweighte­d op­tions that re­duce ex­po­sure to stocks as the child gets closer to need­ing the money. In the past, 529 plans might keep the same port­fo­lio of in­vest­ments for four years or more be­fore sell­ing and mov­ing into a sup­pos­edly less risky port­fo­lio in a sin­gle day, Hume says. But those sud­den move­ments weren’t risk-free.

“Es­pe­cially if there’s a large mar­ket drop on a par­tic­u­lar day, that in­vestor could lock in losses that may be hard to re­coup,” Hume says.

Today, many plans mimic tar­get-date re­tire­ment funds, which re­duce risk grad­u­ally. Even plans that still sell one port­fo­lio of in­vest­ments to buy an­other tend to do so more of­ten to re­duce the pos­si­bil­ity of lock­ing in big losses and give in­vestors a smoother ride, she says.

Cal­i­for­nia’s de­ci­sion to move its Schol­arShare Col­lege Sav­ings plan to a pro­gres­sive glide path helped earn it a gold rat­ing this year, up from last year’s sil­ver. Three other plans — Bright Start Col­lege Sav­ings in Illi­nois, In­vest529 in Vir­ginia and my529 in Utah — also earned top marks for their glide paths, low fees and best-in-class in­vest­ment op­tions.

Slash­ing fees

The in­vest­ment in­dus­try has been slash­ing costs and elim­i­nat­ing com­mis­sions at a “dizzy­ing” pace, so plans that haven’t done so have started to look unat­trac­tive, Hume says.

Morn­ingstar down­graded Ne­vada’s The Van­guard 529 Col­lege Sav­ings Plan, a top-rated plan since 2012, from gold to sil­ver sta­tus for this rea­son. Its fees re­main be­low av­er­age but are no longer among the cheap­est, Hume says.

Cost was also the rea­son that four other plans re­ceived neg­a­tive rat­ings. Those plans in­clude North Dakota’s Col­lege SAVE Plan, New Jersey’s Franklin Tem­ple­ton 529 Col­lege Sav­ings, Arkansas’ GIFT Col­lege In­vest­ing Plan and Ne­braska’s TD Amer­i­trade 529 Col­lege Sav­ings Plan.

The fifth plan to flunk out was Ne­vada’s USAA Col­lege Sav­ings Plan. Morn­ingstar down­graded the plan af­ter Vic­tory Cap­i­tal Hold­ings bought USAA’s as­set man­age­ment busi­ness and added its own man­agers to all the un­der­ly­ing equity funds. The change hap­pened be­fore Ne­vada state of­fi­cials had time to vet the changes, Hume says. Strong state over­sight is a key fac­tor in Morn­ingstar’s rat­ing sys­tem be­cause it de­ters in­vest­ment firms from mak­ing money at the ex­pense of in­vestors.

What to do now

You gen­er­ally can change 529 providers once ev­ery 12 months without trig­ger­ing IRS taxes and penal­ties. But you’ll want to con­sider state tax treat­ment, as well.

Most states of­fer res­i­dents a tax break for 529 con­tri­bu­tions and may re­quire you to pay that back if you trans­fer the ac­count to an­other state’s plan. If you get a tax break and your plan isn’t on Morn­ingstar’s naughty list, it may make sense to stay put depend­ing on the size of that break, the state’s poli­cies on pay­ing it back if you move and the plan’s qual­ity. Check the plan’s site for de­tails.

If your state plan did get a neg­a­tive rat­ing, you have al­ter­na­tives. Many states of­fer more than one plan, and Ne­braska, New Jersey and Ne­vada all have bet­ter-rated op­tions. Also, Arkansas is one of the seven states that give a tax break for in­vest­ing in any state’s plan, not just its own. (Ari­zona, Kansas, Min­nesota, Mis­souri, Mon­tana and Penn­syl­va­nia are other “tax par­ity” states.) Plus, your state could clean up its act. Florida 529 Sav­ings Plan jumped from neg­a­tive to bronze this year af­ter re­vamp­ing its plan.

Not all states of­fer tax breaks, of course. Alaska, Florida, Ne­vada, South Dakota, Texas, Washington and Wy­oming don’t have state in­come taxes, while Cal­i­for­nia, Delaware, Hawaii, Ken­tucky, Maine, New Jersey and North Carolina don’t of­fer tax de­duc­tions or cred­its for 529 con­tri­bu­tions.

If your state doesn’t re­ward you for stay­ing or pun­ish you for stray­ing, there’s lit­tle down­side to mov­ing your money to a bet­ter plan.

This col­umn was pro­vided to the Associated Press by the per­sonal fi­nance web­site NerdWallet. Liz We­ston is a colum­nist at NerdWallet, a cer­ti­fied fi­nan­cial plan­ner and au­thor of “Your Credit Score.” lwe­[email protected] Twit­­ston.

Associated Press file photo

Stu­dents head to class at Mi­ami Dade Col­lege. Most state-spon­sored 529 plans, which help pay for col­lege, have im­proved sig­nif­i­cantly in re­cent years, ex­perts say.

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