By Andrew Leckey

When investing for your child's education, any port in the storm will do.

State-administered 529 college plans that give tax breaks to savers have been one of the better ports for your money since their introduction in 1996. Nonetheless, market volatility, divergent investment results and differing costs mean this is not a completely trouble-free harbor.

While assets of 529 plans are at a respectable level of around $120 billion, they aren't the money magnets that some experts had predicted. The best that can be said is they help parents get their financial act together for their children's futures. For families in the best-performing plans, they have come through in the clutch.

"My husband and I set up monthly automatic transfers from our bank account in 2003 to fund our two sons' 529 plans so we wouldn't have to think about writing individual checks," said Jennifer Zoschak, Yardville, N.J., who has seen assets in those two plans rise in value despite the 2008 market downturn. "We're surprised at how much we've saved since then, which has helped with our son Matt starting college this fall and our other son Brendan with three years of high school left."

Before youngsters can plan on attending college, parents must do homework. That's because 529 plans, though offered in all 50 states, are not all alike. They are structured differently and offer numerous choices managed by a variety of investment firms.

"The 529 plans have gotten more complex, not less complex," observed Greg Brown, 529 fund analyst with Morningstar Inc., Chicago. "There are wide swings between how different state plans perform and in their expenses, so don't just automatically pick the plan of the state where you live."

Some 529 plans have "age-based" choices that shift their mutual fund portfolio as the college date nears, noted Brown, while others take into account risk tolerance by offering aggressive, moderate and conservative plans. Arkansas is the only state to offer an exchanged-traded fund (ETF) plan, the Arkansas iShares 529 plan. That surprises Brown because ETFs are known for low costs and you'd expect greater popularity for college investing.

Morningstar found that the least expensive age-based 529 plan costs 0.20 percent while the most expensive adviser-sold plan costs 2.27 percent. Fixed-allocation options range in cost from 0.10 percent to nearly 2 percent. It is expected that, as was the case with administrators of retirement plans, states will be able to negotiate lower fees for constituents in the future.

All 529 plan withdrawals for qualified education expenses remain free from federal income tax. In addition, some states also offer state tax-deferred growth and tax-free withdrawals for that purpose as well. While most plans permit investors from out of state, it is worth first looking at your own state's plan first due to the possibilities of a state tax deduction, matching grant, exemption from state financial aid calculations or other benefits.

Proceeds of a 529 plan can only be used for education, though you can transfer the account to another member of the family if the original recipient doesn't use it. While you can also get a full refund for withdrawal of the money, you must pay taxes plus a 10 percent penalty on your investment earnings.

"Make your contribution to a 529 plan on a regular basis like a car payment or another bill," advised Kalman Chany, president of Campus Consultants in New York and author of the book Paying for College without Going Broke (Princeton Review: 2010 edition). "There are generous limits as to what can be invested for a student, though you should check how much a state permits in terms of the annual state tax deduction when you decide when to make contributions."

Paralysis is the biggest problem in planning for college because so many parents panic and do nothing, according to Chany. Though college tuition is rising at an average 6 percent annual rate, they hope that an academic or athletic scholarship will magically appear and take care of everything.

Parents should be taking even little steps forward, since a little savings is better than no savings at all, Chany said. That's where the convenience of a 529 plan comes in to get things going. Paying for college is a combination of things ranging from savings plans to filling out financial aid forms in order to maximize grant money and tax credits, he said.

"We like 529 plans because of the advantage of tax-free build-up, but you do lose control over the account," cautioned Mark Balasa, co-president of Balasa Dinverno Foltz LLC financial advisors, Itasca, Ill. "We therefore recommend to our clients that they put the other half of their college savings in the parent's name in a different account where they can retain some control."

Another consideration: If the market tanks you can deduct losses in the taxable account, but can't do so in a 529 plan, he added.

In the most recent Morningstar ranking, the best 529 plans based on several criteria were Ohio CollegeAdvantage; Indiana CollegeChoice 529 Direct Savings Plan; Utah Education Savings Plan Trust; Virginia Education Savings Trust; and Virginia CollegeAmerica 529 Savings Plan. But, again, check out the performance, benefits and costs of your own state's plan first.

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Personal Finance - 529 College Plans Not Completely Trouble-Free

© Andrew Leckey