- The Washington Times - Tuesday, May 13, 2003

Q My company recently began offering a 529 College Savings Plan to employees as a voluntary benefit. With so many of these plans out there, does signing up for the one available through my employer make sense?

A: The college savings plans known as 529s have become extremely popular in the past few years. States set up the plans to help people save for their children’s college education.

The appeal of the plans, named for the section of the federal tax code that governs them, lies in the tax advantages they offer. When a consumer invests money in a plan, the gains are not subject to federal taxes while it remains in the 529, or after it is withdrawn, as long as it is used to pay for education.

Investors who sign up for their own state’s plan may also enjoy significant breaks on their state taxes.

The tax advantages have led to a rapid increase in assets held in the plans, up from $3.15 billion in 2000 to $20.05 billion last year, according to Boston-based Cerulli Associates. Every state now sponsors a 529 plan, and the plans are open to investors even if they’re from other states. Investors can sign up directly with a state, often with minimal fees involved, or through a broker or financial adviser, who may charge higher fees that ostensibly cover their consultation services.

In the past couple of years, thousands of employers have begun offering workers access to the plans, although enrollment rates so far have been quite low.

Such employer-offered plans vary widely by company, in terms of the states that sponsor them and the corresponding tax advantages, the fees that may apply, the investment options available and advisory services that may be included.

That means investors need to scrutinize specifics, since there are important pros and cons to consider.

“You really have to make a judgment about whether opening up a 529 in the workplace is any better or worse than opening it up on your own,” said Joseph F. Hurley, who runs Savingforcollege.Com, a Web site filled with information on 529s.

On the plus side, many companies allow workers to put money into a 529 using automatic deduction from their paycheck or bank account, which can make the process easier.

In addition, some states and brokerage firms eliminate some fees for investors who sign up through an employer. Some brokers normally charge fees of up to 5.75 percent for each contribution to a plan,Mr. Hurley said.

By accessing such a plan through an employer, investors may also have access to a financial adviser, said Sarah Henricksen of Strong Financial, a Menomonee Falls, Wis., firm that operates plans for three states and offers them through about 200 employers.

The downside of signing up through an employer is that most companies usually offer just one or two plans.

That can be particularly limiting for workers at multistate employers, offered a plan that originates from beyond their home state.

Signing up with such a plan can mean losing out on sizeable home state tax advantages.

New York state, for example, allows couples filing taxes jointly to contribute up to $10,000 per year free of state taxes. Wisconsin allows residents to deduct contributions of up to $3,000 per child each year.

The result is that investors interested in a 529 should at least compare the plan offered through their employer with the one sponsored by their own state, and perhaps with those offered by other states.

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