529 plans are the best way to save for college. When I hear someone proclaim this as fact, my inner 12-year-old screams, "Says who?" Well, it seems that most everybody says so. In fact, I once had a senior tax partner at one of Virginia’s largest CPA firms tell me that he "recommends 529 plans to everybody because that is all anybody needs."
So, financial advisors, accountants, and even state advertisements extol 529 savings plans as the way to earn tax-free growth of college accounts. Some experts gush that 529 plans are kind of like Roth IRAs for college. Ignoring whether these plans really do provide tax-free growth (and you should know that they don’t always), why are all of these nice people so interested in helping cut your taxes?
My theory? It’s about money, not yours, theirs. A broker’s motivation seems obvious. They get commissions on your 529 investments and have an opportunity to talk about more lucrative investments like your juicy IRA. An accountant’s motivation is harder to figure. However, because I am a non-practicing CPA, people often grouse to me about how little their accountant really does to reduce their taxes. Suggesting a 529 is a good way for the CPA to demonstrate value that keeps clients coming back for annual tax return preparation. Since they can "recommend a 529 plan to everybody," accountants can propose a quick tax savings strategy without doing a lot of analysis.
Your state’s motivation may be less obvious but it is still a money grab. Did you know that most (but not all) states authorize program fees for the 529 plans they sponsor? These fees are over and above the normal mutual fund expenses and commissions. Some plans charge as much as .85% of your balance every year with .25% being a pretty typical amount. To put that into perspective, consider that the 50 largest 529 savings plans have approximately $104 billion in assets. If the average program fee is .25%, families pay $260 million every year to the states and their investment firm partners. That’s enough money to award 9,200 students full four-year scholarships (tuition and fees) to their state’s public colleges.
Now I’m all for folks making a buck. However, I wonder if everybody recommending 529 plans gets influenced by the money they could earn – not the money you could save.
