What is a 529 Plan

529 Plan Fees and Expenses

The most important thing to be aware of 529 college savings plans are the fees and expenses associated with the plan. The management of underlying investments comes with fees and expenses that are similar to mutual funds. Meanwhile, prepaid tuition plans come with enrollment and administrative fees.

Moreover, third party broker-sold plans may charge enrollment fees, asset management fees, and annual maintenance fees for college savings plans. Before investing in a college plan, carefully review the fees of the underlying investments.

If you purchase a third party broker-sold plan, added “front load” payments maybe involved. Basically, the load is a commission charged for selling the college savings plan to you. Most third party sold 529 plans also charge an annual distribution fee (like the mutual fund’s “12b 1 fee”) of between 0.25% and 1.00% of your investment plan.

Most 529 broker-sold plans include more than one class of shares that have various fees and expenses. These are key characteristics of 529 plan share classes offered by brokers to their clients:

Class A shares impose a front-end sales load. These front-end sales loads diminish the initial amount of your investment. For example, if you have $5,000 and invest in a college savings plan with a 2% front-end load, your sales load is $100. Herein, your initial investment is $4900.

Due to the front-end commission, Class A shares have lower annual distribution fee and expenses than other 529 share classes. Furthermore, front-end loads can be reduced if your investment reaches a threshold amount, known as breakpoint discount. Breakpoints don’t apply to Class B or Class C shares. Class A shares are best suited for long-term investors.

Class B shares do not have a front-end sales load. In its place, there are fees or penalties for early withdrawal, known as a back-end load or deferred sales charge. Also known as “contingent deferred sales load” or “contingent deferred sales charge” (also known as a “CDSC” or “CDSL”).

The CDSC decreases over time, decreasing to zero if you hold your investment long enough. The Class B shares have higher annual distribution fee and expenses than Class A shares. After the Class B shares reach zero CDSC, the B shares convert automatically to Class A shares. Class B shares are best suited for medium term investors.

Class C shares may have an annual distribution fee, other annual expenses, and generally don’t have a front- or back-end sales load. If front-end or back-end loads are present, they will be lower than Class A or Class B shares. Class C shares have higher annual distribution fees and annual expenses than Class A shares. Unlike Class B shares, Class C shares don’t convert to another Class over time. Class C shares are best suited for short-term investors.

529 Savings Plan Restrictions

There are withdrawal restrictions regarding both pre-paid tuition plans and college savings plans. Additionally, college savings plans have narrow investment options and may have restrictions in terms of being able to switch freely among the investment options. Investment in a 529 plan should be carefully considered by reading the plan’s offering circular to make sure limitations are fully understood.

529 Plan Impacts Financial Aid Eligibility

Various higher educational institutions assess financial assets differently, including the amount invested in 529 plans. If a 529 plan is included, a college student’s eligibility reduces need-based financial aid. Pre-paid tuition plans and college savings plans are treated as parental assets in the calculation of the expected family contribution toward college and university costs. Previously, benefits from pre-paid tuition plans were not treated as parental assets and typically reduced need-based financial aid on a dollar for dollar basis, while assets held in college savings plans received more favorable financial aid treatment.

Is a 529 plan right for me?

Before you begin considering 529 college planning, you must consider your overall financial situation. It may be more feasible to focus on other financial goals like saving for retirement, buying a home, or paying off high interest credit card bills. Remember penalties or fees are instituted if you do not use the money in a 529 account for college education expenses. 529 plans can be used in conjunction with other tax-advantaged college education plans, such as Coverdell IRA’s, Uniform Gifts to Minors Act (“UGMA”) accounts, Uniform Transfers to Minors Act (“UTMA”) accounts, EEE savings bonds, and tax-exempt municipal securities. Also, you can also open a regular taxable brokerage account to save for a beneficiary’s higher education. The choices are there, you just have to implement a strategy that works for you.