One Kansas college savings plan may have gotten a less-than-stellar rating, but local financial advisers said this week that Kansans have a lot of choices when it comes to saving for their children’s college through 529 plans.
In mid-October, Morningstar Inc. gave the Kansas’ Schwab 529 College Savings Plan a negative rating — one of four 529 plans across the country to receive the rating. In that same Morningstar report, an annual update to its ratings of 529 plans, it gave a bronze rating to the only other Kansas 529 plan, the LearningQuest 529 Program. In all, Morningstar rated 64 plans. Four received gold, the top rating, four received silver, 19 received bronze and 33 received neutral.
Morningstar’s ratings take into account things such as a plan’s return on investment, investment choices and administrative fees. Advisers said 529 plans are structured like a mutual fund, in which the plan comprises the stocks of a variety of companies in a variety of industries.
The plans, named after the IRS tax code that created them, have gained in popularity because money in a 529 grows tax deferred and the proceeds are tax-free when they are used to pay for tuition or education-related expenses such as books and room and board. The 529s can also be used to pay for vocational or technical education expenses, advisers said.
The reason local advisers said Kansans have an advantage in 529 plans is because in Kansas, a person can invest in a 529 plan from another state and still get deduction on their Kansas income tax return.
“Some states require that you invest in that state’s plan in order to get to take that income tax deduction,” said Brent Barker, senior wealth adviser for Intrust Bank private wealth management.
Barker said he’s using an Ohio 529 plan to pay for his child’s tuition at Kansas State University.
“That’s where having an adviser helps,” Barker said of Kansans’ options to invest in a lot of different plans.
Barker and Don Baxter, founder of Baxter & Associates, a 36-year-old financial planning firm, said there really aren’t any other college savings plans that offer the tax-savings benefits a 529 does.
“Most of the time a 529 is an excellent choice because you can get the money growing in a tax-free environment, the donor doesn’t lose control, and they can transfer the funds to another beneficiary,” Baxter said.
The control issue is one reason that 529s are popular with grandparents, Baxter said. “In our situation I would say 50 percent of the 529s are set up by grandparents,” he said.
He said the person setting up and contributing to the 529 — the donor — can make sure the money they are saving goes for the beneficiary’s education. If the beneficiary doesn’t need the money from the 529, the donor can transfer the proceeds to another beneficiary who will use it for education. And the donor can appoint someone else other than the beneficiary to control the 529 should the donor die.
Baxter also said that the money a donor contributes to a 529 is also not considered part of the donor’s estate. “That could be very big,” he said.
Contributing: Associated Press