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College-savings plans have come of age. If you've been meaning to start one, there's no reason to wait anymore.
Every state has a 529 college-savings program that allows you to invest tax-free. But the costs in many of these programs used to be so high that they weren't worth the trouble.
That's changed in recent years. Competition has driven down fees -- hands down the most important factor when choosing a plan -- to the point that some plans are cheaper than conventional mutual funds. Consider Virginia's plan, the largest in the nation with more than $14 billion in assets. Its fees are capped at 0.56% of assets, about one-third the cost of a typical stock mutual fund.
If there's a downside to the boom in 529 plans -- they held $82.49 billion at the end of last year -- it could be that so many people are participating that colleges will have no incentive to rein in their absurdly high costs.
4 years: $314,000
How high is high? The planning calculator at my state's site says that by 2023, four years at Rutgers University will cost more than $205,000, or three times what our family paid for my son, Class of 2002. Private schools, the calculator says, will cost even more -- in excess of $314,000. The calculator assumes an inflation rate twice that of prices in general.If I expect to foot 100% of the bill for my one-year-old grandson, the calculator says I've got to contribute $392 a month for the next 17 years. That's assuming a 6% return, which is reasonable because I'm expecting an era of 7% gross returns, and New Jersey's costs are high -- a maximum of 1.24%, and that's for the no-load fund option. Broker-sold funds cost more.
When you go shopping, comparing investment results of 529 plans is less fruitful than using other criteria. Yes, riskier funds do sometimes perform better, but the real way to improve your results is to cut costs.
Consider the benefit of shaving your costs by 1%: Over 18 years, a return of 7% on an investment of $100,000 is $338,056 -- some 18.4% more than the $285,480 a 6% return delivers.
Small plans, big costs
Which plans are most expensive? Think small. Plans in less-populous states often have fewer participants, and thus fewer assets, over which to spread costs. The no-load version of Arizona's Pacific Funds 529 College Savings Plan charges 1.1% for a money-market fund and as much as 2.05% for individual funds.Wyoming is in the process of closing its College Achievement Plan -- which has just $1.4 million in assets and 191 participants -- and shifting participants into Colorado's plan. Wyoming's plan has costs as high as 2.43% in its no-load version. Expenses in Colorado's Direct Portfolio College Savings Plan are capped at 0.75%.
As you might expect, larger states do a much better job with costs. Here's a look at the programs offered by the most populous states:
| State | Maximum contribution | Maximum expenses | Maximum state income tax | Contributions deductible in state |
|---|---|---|---|---|
California | $300,000 | 0.80% | 9.3%* | No |
Texas | $257,460 | 1.75% | None | N/A |
New York | $235,000 | 0.56% | 6.85% | Yes |
Florida | $287,000 | 0.75% | None | N/A |
Illinois | $235,000 | 0.99% | 3.00% | Yes |
Notes: *10.3% on incomes of more than $1 million. N/A: not applicable. Sources: MSN Money,
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