Considerations for Opening a 529 College Savings Plan
Typically, 529 college savings plans are offered by states. Contributors who use their own states’ plans often receive state tax benefits, along with federal tax benefits. For example, contributors to 529 plans in some states may be able to deduct their contributions from their own state income tax and withdraw earnings at the state level tax-free. In addition, some states offer to match their residents’ 529 contributions. But these are only incentives; contributors are free to open a 529 college savings plan in any state.
Contributors may open a 529 college savings plan in two different ways:
- • Advisor-sold plan. This kind of plan goes through an authorized investment firm and offers access to an investment professional who can advise the contributor, but the firm may have higher fees and additional charges. These are also called broker-sold plans, because they are often sold through a network of brokers. As we will see, advisor-sold plans are sold as different share classes, each having a different fee structure (e.g., A shares, B shares).
- • Direct-sold plan. With these plans, an investor goes straight to the source by purchasing from the state or its primary distributor. A primary distributor is considered the plan’s underwriter. Usually, this kind of plan is offered through the internet and provides a toll-free number to call. This kind of plan generally has lower fees, but does not provide investment advice. Direct-sold plans can sometimes be purchased through a selling dealer, also called a selling broker. A selling dealer is a municipal securities dealer, other than the state’s primary distributor, that sells such plans under a selling agreement it has with the primary distributor. In an effort to better market 529 college savings plans, distribution networks of selling dealers and banks assist the prim