Potential Problems With 529 Qualified Tuition Plans

POTENTIAL PROBLEMS WITH 529 QUALIFIED TUITION PLANS...

• These Plans are very attractive. Given the potential revenue available, it's no wonder financial services firms, including mutual funds, are marketing them aggressively. Unfortunately, this also brings high commissions and extra expenses.

• By law, only states can sponsor 529 savings plans and direct how funds are invested. However, states contract with mutual fund companies and other financial firms to manage and market the state programs.

• Mutual Fund sales materials and advertisements are regulated and reviewed by NASD. But if they are part of a 529 Plan, no such requirements apply!

Watch out about purchasing an out-of-state plan (even if you purchase from a California broker. Earnings or qualified withdrawals from an out-of-state savings plan that is a qualified IRC Sec. 529 plan would not be subject to state tax in California. But, unexpected results occur depending on the residence of the contributor and beneficiary , and if the distributions are "qualified."

• Some 529 Plans have very high fees, and these are NOT required to be fully disclosed. There can be Enrollment fees, Annual maintenance fees, and "asset-based" fees. Some of these fees are OK, but should not be excessive! Unfortunately some plans do have very excessive fees. The plan fees can be higher than the tax savings!

• Paying in advance for predetermined tuition should also be given careful consideration.

Normal investment advice is to take higher risk with longer term investments. However, this has caused some of my clients to have permanent losses in their 529 accounts for their children. A more balanced portfolio should substantially reduce risk of permanent losses.

• 529 Plans have many positive features! And, they deserve comparison shopping and careful consideration of your specific situation.

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