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529 Plans - When to Change Providers

Oct 19, 2012

Does it make sense to switch out of an expensive or poor-performing plan? Keep in mind that some states such as New York and Illinois require you to pay back the money you deducted from state income taxes if you move money out of that state's 529 plan. And you could also pay a fee of about $50, on average, to make the switch, said Joe Hurley, founder of SavingForCollege.com, a website that offers advice on college savings, particularly 529 plans.

"Sometimes you can find another 529 plan that has essentially the same make-up of mutual funds in another state, with lower fees; then it becomes compelling to make the move. You can expect the same pre-fee investment, for a higher post-investment outcome," said Hurley.

There's no prohibition against having multiple plans, either, so you could always just stop contributing to an in-state plan you don't like and open a new plan in another state, without moving any money and incurring switch fees and taxes.

Before making a switch, it may be possible to improve savings by reallocating the funds that are invested in a 529 that is rated "neutral" or "negative".

Many plans with options to allocate savings in large equity or bond mutual funds can be reworked to place all or most of the savings in one of these funds. A federal law allows reallocations as well as rollovers to take place no more than once a year.

Morningstar analysts' concerns with some of the "negative" plans were due to the inclusion of a few weak funds. They also largely contained funds groups like Blackrock, however, which provided more stable investment options.

If you are making a small investment, chances are that you won't get much of a tax benefit with your state's deductions. It may be worth shopping for an out-of-state plan with better performance.




Got further questions? Catch me on twitter and DM me @529SavingsPlans or e-mail me at 529CollegePlans at Gmail.comWant to be heard? Leave a reader comment below.

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