Chapter 24. Find the Right 529 Plan

Buried amid news of the economic crisis in early 2009 was a curious factoid: The Obama daughters' college savings, invested in Illinois broker-sold Bright Directions College Savings Program, were estimated to have lost roughly 30 percent in 2008.

Of course, the first daughters have plenty of time to recoup their losses: Malia has roughly six more years until college, and Sasha has about nine. And in any case, I'm not going to lose any sleep over the Obamas' ability to pony up for tuition when the time comes. Barack and Michelle Obama contributed $240,000 to the girls' 529 plans in 2007 (the maximum they could contribute that year without having to pay gift tax), putting their daughters' college funds light years ahead of most other kids' in their age range.

Nonetheless, their losses point out the difficulty of navigating the crowded 529 landscape. Participants first have to decide whether they should stick with their states' own plans—as the Obamas did—or opt for an out-of-state plan and forgo the tax deduction that they may receive on in-state contributions. That judgment rests on an assessment of the quality of the in-state plans, as well as quantifying the savings associated with the tax deduction.

And if 529 investors choose to go out of state, they then have to sift through nearly 100 separate programs, comparing fund choices, layers of fees, and asset allocations. To make matters worse, official 529 documents can be opaque. It's no wonder parents ...

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