Memphis Firm Says 529 College Savings Plans May Be Wrong For Some Investors

NU Online News Service, Aug. 16, 12:16 p.m. – Waddell & Associates Inc., Memphis, a fee-only investment advisory firm, says clients should think carefully before setting up 529 college savings accounts.

The 529 programs, based on Section 529 of the Internal Revenue Code, offer generous federal and state tax credits and tax deductions on contributions and account earnings.

Some states let residents use 529 account assets to cover their own tuition and education expenses as well as the expenses of children and grandchildren. In theory, a resident in one of those states could use a 529 account to cover the tuition payments, living expenses and other costs involved with “retiring” by becoming a full-time student.

But Waddell has published an analysis by Phyllis Scruggs and Carol Lee Royer, two financial planners at Waddell, recommending that investors consider factors other than tax savings when looking at the accounts.

Many states have hired a single investment company to manage the mutual funds for their 529 programs.

Even if the funds within the fund family have different investment objectives, they may own shares in the same companies or have other characteristics that reduce diversification, Scruggs warns.