A 529 account is a common way of saving for future college expenses due to the tax benefits the account may provide. In my experience, I’ve found many people have a basic understanding of why saving to a 529 may be a good idea if paying for college expenses is a goal. However, what I’ve also realized is many people are unaware of their options when establishing 529 accounts. The purpose of this post is simple…to call your attention to two types of 529 plans offered by the State of Ohio and point out the potential costs of each.
Let’s begin with some basics though.
What is a 529 account?
First, try not to let the term “529” confuse you as that is just a reference to the section of the Internal Revenue Code that discusses the accounts.
In simple terms, a 529 account is a tax-advantaged way of saving for college expenses. When funds are contributed to a 529 account, you must decide how to invest the account. Your options may include, but are not limited to, mutual funds, CDs, and money market funds. Provided certain conditions are met, contributions to the account, and any subsequent investment earnings, may be used for future college expenses without paying taxes on distributions.
Depending on the 529 plan provider you select, you may even receive a state tax benefit for contributing to the account. 529 accounts may be used to pay for qualified education expenses at colleges nationwide though. In other words, just because you invest in an Ohio 529 plan does not mean those funds are only available for use at educational institutions within Ohio!
What options does Ohio offer and what are their underlying costs of each?
Ohio currently offers two types of 529 accounts: Direct and Advisor.
Ohio’s direct option allows investors to open an account directly through the plan at www.collegeadvantage.com. This option requires the investor to open the account on his or her own and select how the account should be invested. There are no sales charges (i.e. commissions) associated with these accounts.
In contrast, as the name suggests, the advisor option may only be opened through a financial advisor. Advisor accounts are offered through Blackrock. The advisor likely facilitates the account opening process and determines how the account should be invested. In addition, the advisor is compensated via sales charges (i.e. commissions) as contributions are made to the account.
For some, working with an advisor to open these accounts may seem like a good choice. After all, you don’t have to worry about making investment decisions. However, according to a comparison by Savingforcollege.com, the cost of the advisor option may be substantially higher than the direct option.
Here’s a summary of potential annual expenses, expressed as a percentage of the value of the account:
I’m certainly not one to believe all participants in the advisor option pay 2.42% per year, but it’s clear one plan may be more expensive than the other. Will an advisor that recommends this type of plan really be able to justify the higher costs? Probably not! And here’s why…
Once you’ve determined how your 529 account should be initially invested, it’s important to periodically review your financial situation to determine whether changes are necessary. Generally speaking, an investor should likely reduce risk within the account as the beneficiary (e.g. child) gets closer to college-age. However, the IRS only permits you to change investments within a 529 account twice per calendar year. In other words, if an advisor is to justify the higher costs of the advisor plan, it likely won’t be due to “active” management!
There are many factors you should consider when determining whether a 529 account is in your best interest. But once you’ve made the decision to open a 529 account, I hope this serves as a reminder to compare ALL options (you should even consider 529 plans outside of Ohio)…particularly if you work with a financial advisor that recommends the more expensive plan!