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Maximize your college savings plans
ATLANTA (1/14/14)--The new year has many people taking stock of their financial situation and setting goals for the next 12 months. But now is also a good time to look further into the future and begin tackling one of the biggest financial challenges--saving for college. 
Since they were created in the '90s, tax-advantaged 529 savings plans--state-sponsored accounts named after the IRS code that created them--have been among the most popular investment vehicles for families saving for college.
But during the financial crisis the typical 529 plan for seven- to 12-year-olds lost about 28% of its value, according to the investment research firm Morningstar. Many 529 plans were revealed to have fatal flaws, such as poor management and expensive overhead (CNN, Jan. 7).
Many of these plans, however, bounced back during the economic recovery, and now feature lower fees and more investment options. The average fee for 529 funds dropped from 0.84% to 0.72% over the past three years, making them attractive again for families.
Here are some strategies to ensure you make the most of your 529 plan investments:
  • Take advantage of tax breaks. The primary benefit of the 529 plan is, as long as you use the money for qualified college expenses, you don't pay taxes on your investment gains. However, 34 states allow you to deduct or receive a credit for 529 contributions to offset your state income taxes, with an average value of $87 for every $1,000 invested.
  • Research your state's plan. You can invest in any state-sponsored plan, regardless of where you live. However, if your state offers a tax break, in most cases you're better off staying in that plan as it takes years of high performance to offset the tax savings. But if your state's plan is expensive, it's worth considering another state's plan, especially if there's no penalty for rolling the balance over.
  • Sign up on the Internet. Enroll in a 529 plan on the provider's website and avoid the commissions and fees charged by brokers and advisers.
  • Ensure the plan has the right mix for you. Most 529 plans offer age-based portfolios managed by a sponsor; these are the most popular and often easiest choice for parents. But within those plans the asset mix can vary greatly. Make sure that as your child gets closer to college age, the portfolio's risk decreases appropriately.
    According to Morningstar, the states with the best overall 529 plans are Utah, Maryland, West Virginia and California.
For related information, listen to "Parental Income Dings a Student's Financial Aid" in the Home & Family Finance Resource Center.

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