College Savings Plans

KIDS AND MONEY:
THE GIFT OF A PROMISING FUTURE

by Steve Rosen

Instead of showering your child or grandchild with stuff and more stuff, give a gift that has more permanent value: a 529 college savings plan. And while shopping for a plan can be complicated and confusing, new research on 529s from Morningstar
could make the selection process easier.

With a state-sponsored 529 account, earnings are not subject to federal taxes as long as the withdrawals are used for qualified education expenses, including tuition
and technology. Even sweeter, many states offer tax deductions to residents on contributions to a plan.

Remember, you don’t have to limit your shopping to your own state’s plans, nor is there any requirement that your future college student attend good old State U. in
order to reap a 529’s tax benefits. And, remember, it’s the owner, not the beneficiary, who controls the assets in a 529. You can usually link your account to your 529 account so you can make regular savings, if you wish.

There’s certainly a lot to think about when choosing a 529: Which ones are the best and worst plans? How do fees stack up? What about the quality of the investment
management team? Performance? That’s where a new report from Morningstar, the research firm best known for its mutual fund rating, provides help.

The company recently released its latest rankings of 529 plans, a comprehensive analysis of 62 plans nationwide that hold about 95 percent of the more than $300 billion in investment assets. Morningstar ranked the plans on more than just investment performance. It also analyzed fees, investment management, investment
options, oversight and whether plans offer any special benefits such as scholarships, grants and matching programs. Based on those factors, Morningstar tagged a plan with either a gold, silver, bronze, neutral or negative rating.

Four plans earned gold ratings this year: Illinois’ Bright Start College Savings plan, Invest 529 in Virginia, Nevada’s Vanguard 529 College Savings plan and the my529/Utah Educational Savings Plan.

There were 9 silver-rated plans, and 18 bronze, while 26 earned neutral reviews, which means those plans still hold some appeal because of state tax breaks.

Morningstar, which has produced the 529 ratings since 2012, also recognized two “most improved” plans for 2018: The Oregon College Savings Plan and Arizona’s Ivy Invest Ed 529 plan.

On the flip side, the research firm handed out negative ratings on five plans largely because they haven’t cut fees as aggressively as their counterparts.

The worst plans: College Save in North Dakota, 529 College Savings in New Jersey, the GIFT college savings plan in Arkansas and the TD Ameritrade 529 college savings plan in Nebraska.

“The 529 industry continues to make significant fee cuts, so plans standing still on fees have become increasingly unattractive,” said Leo Acheson, a Morningstar associate director.

If you’re considering gifting a 529 account to a child or grandchild, check with the plan managers to see if they offer a card or certificate of ownership that you can wrap.