College 529s get more creative to attract savers

03/09/2012 11:02 PM

05/16/2014 6:12 PM

The good news: Money in state-sponsored 529 college savings accounts grew by more than 4 percent in 2011, despite the roller-coaster stock market.

The downside: Net contributions — total contributions minus withdrawals — were down slightly at the end of last year compared with 2010, according to data released in late February by the Financial Research Corp.

The end of the year is when families typically withdraw from 529s to pay college bills. But the numbers also reflected skittishness about stocks and household belt-tightening that pinched the amount of new money flowing into 529s.

And the outlook? To slow the exodus of dollars from 529 accounts and to encourage more families to start saving early, some states are sweetening their plans.

Fees are being cut; investment options are being added, such as low-yielding but relatively risk-free money market accounts; and a growing number of states are even paying savers to plunk money into 529 accounts.

On March 1, for example, Missouri became the 12th state to offer dollar-for-dollar matching grants to eligible residents of up to $500 annually, or a lifetime maximum of $2,500. The money is offered first-come, first-served.

Kansas has offered a slightly different approach on its match for several years. The state matches contributions above $100 and up to $600 per year by residents with household incomes below 200 percent of the federal poverty level.

By all reports, the matching programs around the country have generally worked well, with the exception of Illinois. The incentive backfired there two years ago when the state quickly ran out of money to meet the demand for the match.

The 529 plans, such as Learning Quest in Kansas and MOST in Missouri, have long been popular because earnings are tax-free as long as the funds are used to pay qualified higher education expenses. Many plans also give you a break on state income taxes — but remember, you generally are not tethered to your state’s plan when it comes to investment choices.

The matching programs and other 529 incentives come at a time when many families are grappling with how to put away money for their children’s college education when there are lots of other bills in the pipeline to be paid.

If you are considering opening a 529 account or are mulling other strategies, here are some issues to keep in mind:

•  Compare 529 rates of return, fees, and features, including one-, three-, and five-year rates of return at www.savingforcollege.com, and www.collegesavings.org.

•  There’s a mini-arsenal of products that can help you save for college — 529s being just one.

Some families are not big fans of 529s because of their limited investment options, so they’re stashing education cash in Roth IRAs.

Another approach: Families with children nearing college are choosing less risky strategies, such as money market accounts and certificates of deposit. The trade-off for safety, however, is that there’s little in the way of return.

If possible, don’t wait until the end of the year to fund a 529 or other college savings plan. Many 529s have low initial minimum investments, so add a little bit every month.

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