Make the Most of 529 College Savings Plans

In many states, you can invest in529 plans through brokers, payinghefty brokerage fees, ordirectly through the program'sinvestment administrator withoutpaying such fees. As with loadfunds, you will hear the argument thatthe sales commission is justifiablebecause you obtain valuable advice forit. Although the advice may be valuable,it cannot be valuable enough tojustify the exorbitant commissions.

Avoid Brokerage Fees

Because of their various complexitiesand constraints, investing in 529 isa lot more difficult than investing inIRAs. But the advisors at TIAA-CREF(tiaa-cref.org) and Vanguard Group(www.vanguard.com) offer excellentadvice for free. If you need more hand-holdingor want more personalizedadvice from a knowledgeable thirdparty, go to a fees-only financial advisoror college financing specialist. Payfor the advice up front, and then save alot of money over the years by using thedirect 529 programs.

Another key question is whetheryou should go with an automatic age-basedinvestment option or pick individualfunds and effectively managethe investment yourself. Rememberthat most physician-investors, especiallythose with a high income and largeportfolios, should treat the money in a529 savings account as part of theiroverall portfolio for asset-allocationdecisions and take full advantage of itstax break in that context.

For example, investors should generallyput their fixed-income investmentsin tax-deferred accounts andequity investments in taxable accounts.So for many investors, it makes senseto put the money in the 529 accountsin bond funds or other fixed-incomeoptions, whereas if you choose an age-basedaccount, most of the money,especially during the early years ofyour child, will be invested in stocks.

Portfolio View

The 529 plans are ideal for fixed-incomeinvesting because when youwithdraw the money you won't have topay taxes on the income you earn overthe years. Even regular IRAs and401(k)s can't match this level of tax-saving.But because of the constraintsand limited investment choices offeredby 529s, taking full advantage of thisfeature on your own maybe difficult.This is also one area where the educationalsavings advisers at TIAA-CREFor Vanguard may not give you the rightadvice because they are not positionedto help you make the right decision inthe context of your overall portfolio;they may focus on your 529 account.

Considering everything, if you aremanaging all of your money on yourown, you will probably be better offchoosing an age-based approach for529 accounts. But if you have a knowledgeablefinancial advisor, they willprobably be able to squeeze out a fewextra percentage points of return, earningyou thousands of additional dollarsover the years by doing the asset allocationright and taking full advantage ofthe attractive tax features of 529s.

Chandan Sengupta, author of The Only

Proven Road to Investment Success (John

Wiley; 2001) and Financial Modeling Using

Excel and VBA (John Wiley; 2004), currently

teaches finance at the Fordham University

Graduate School of Business and consults with individuals

on financial planning and investment management. He welcomes

questions or comments at chandansen@aol.com.