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We already have adviser-purchased 529s for our two sons (in Virginia's CollegeAmerica) that we initially funded but don't continue to contribute to on a regular basis. My husband and I would like to start contributing monthly but feel advisers look out for their best interests more than ours. My husband thinks we should start investing in New York's College Savings Direct (we are New York residents) to make the most of our money. But does it make sense to have 529s in two different states -- and is it allowed? Should we make new deposits to the New York plan or should stick with the Virginia plan?
You've been giving up a big tax benefit by investing in Virginia's plan rather than New York's. New York residents can each deduct up to $5,000 a year in contributions to New York's 529 plan ($10,000 per couple). But you can't take that deduction if you contribute to another state's plan. In fact, federal regulators cracked down on several brokerage firms a few years ago for pushing out-of-state 529s that left clients missing out on their state's valuable tax breaks. See this FINRA Investor Alert for more information.
In addition to the state income-tax deduction you'll get as a resident of New York, you'll also be able to invest in low-fee Vanguard funds in New York's direct-sold 529 plan. If you feel comfortable making your own 529 investing decisions, then you might want to keep all of your 529 money in this plan. If you don't want to create the portfolio yourself, you can select one of the plan's age-based portfolios, which gradually become more conservative as your child gets closer to college age.
If you like the investing help you've been getting from your adviser, then you might want to keep some of your 529 money in Virginia's plan. You pay extra for adviser-sold 529s, but the extra fee may be worthwhile if the adviser does a good job of managing your portfolio.
Our favorite adviser-sold 529 is the one you're in now, Virginia CollegeAmerica, which lets advisers choose from 22 American Funds. But because you're a New York resident, we still recommend investing at least enough in New York's plan first to get the state income-tax deduction. You can contribute to as many different 529 plans as you want.
It's generally best to invest in your own state's 529 plan if you can get an income-tax deduction for your contributions. But after you've maxed out your own state's tax benefits, you may choose to invest in another state's plan, too, if it has lower fees, better investing choices or another benefit that your state's plan doesn't offer. And for people whose states don't offer an income-tax deduction for 529 contributions, we generally recommend considering one of Kiplinger's favorite plans -- no matter in what state they live. See The Best 529 College-Savings Plans and our Find the Best 529 Plan map for 529 recommendations based specifically on your state plan's income-tax rules, investing choices and plan fees.
For more information about saving for college -- in both 529s and other types of accounts -- as well as strategies for paying for college, see our Paying for College center.
POSTED BY: Jeff Frese (August 20, 2008 10:03 AM)
Once you open your 529 plan (you can) register it with Freshman Fund (www.freshmanfund.com). Freshman Fund is like a registry for college savings and it works with all 529 plans including direct and advisor sold plans. Parents go to the site, attach their 529, create a public profile and email friends and family a link where they can contribute directly into the child's 529 account in lieu of or in addition to the usual birthday/holiday gifts....
DISCLOSURE: I’m the founder of Freshman Fund. I was at my niece’s birthday party watching her tear through a pile of gifts taller than she was. At the end of the melee my gift was tossed aside into a pile of other forgotten gifts. I spent a-lot of time and money selecting her gift and I though it was a waste. I told her parents that from now on I was just going to contribute to her college savings. I asked them what website to go to in order to that and none existed. So I started Freshman Fund.
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