An important question to ask is whether you will invest in a 529 plan directly, or will you use a financial adviser? Your answer to this question will help narrow down your choices, as about half of all 529 plans are sold through brokers.
Direct-sold 529 plans
Here are the two most common reasons for buying a 529 plan directly — a do-it-yourself approach to 529 investing:
- You will incur lower expenses with direct-sold 529 plans. Broker-sold 529s generally have higher annual costs and may include sales charges of anywhere from from 1 percent to 5.75 percent of your contributions. Also, many of the direct-sold 529s (but few of the broker-sold) invest in index funds with low expense ratios. See our list of 529 plans with the lowest fees.
- Your state may offer a direct-sold 529 plan with special incentives. If you are a resident, you may be eligible for a state income-tax deduction, a matching contribution, a scholarship or other financial-aid boost, or special protection of your account from creditors. While these benefits will not make your investment decision a slam-dunk, they should be factored into the search equation. Research the specific features of your state’s 529 plan to see if any of these apply to you.
The biggest ‘cost’ to the do-it-yourself approach is the time and effort you will have to invest to research the alternatives and get comfortable with the tax rules and other investment goals that apply to your personal situation.
Advisor-sold 529 plans
Broker-sold 529s offer definite advantages as well.
The most important benefit is that you will be receiving advice from a financial professional that can extend beyond planning for college. A capable professional will attempt to match the right 529 plan to your particular investment goals and risk preferences and help to coordinate your college planning with your other financial objectives, such as affording a comfortable retirement or minimizing potential estate taxes.
Comprehensive financial planning is no small task. And while financial professionals are generally not permitted to dispense legal or tax advice, their knowledge of the quirky rules and restrictions surrounding the income tax and gift tax treatment of 529 plans can help immensely.
Also, certain mutual funds are available only through broker 529s.
Use our ‘Find a 529 pro’ directory to find a financial planner. The planners listed here are tested by us, have access to our professional-level 529 content and tools and many have attended our educational workshops. The directory includes contact information on both commissioned brokers and fee-only financial planners in your area.
Even if you feel capable of doing the research and planning on your own, you may decide that the time you save by using professional financial help is worth the cost which typically will be either commission-based or fee-for-service. Brokers generally receive a commission on the amount you invest. Fee-only planners bill on an hourly basis or charge a certain percentage of the value of your portfolio.
The next step: Finding the right 529 plan
Now that you have chosen your investment style, research the plans available to you. You should compare the detailed features of each plan against another to see which offers the best combination. To learn how to compare plans read our article ‘How to compare 529 plans’