Tuesday, February 23, 2010

86 The 529

A story in the Education section of the Journal discusses pre-paid tuition plans, a special case of 529 college savings plans. (For those without children and therefore not up on the details of college funding, these plans allow savers to invest tax free, as long as the proceeds go toward college tuition.) It turns out most investors in pre-paid tuition plans didn't read the fine print: Counterparty credit risk. They turned their cash over to state controlled entities that blew their money, and can't make good on their commitments.  There's a shock.

Add incompetent state oversight to the list of bad management, lousy investment options and absurd add-on fees.

But what's the real problem? These programs only serve to benefit the wealthiest people, yet they entail huge bureaucratic expense. (Note the state bailouts in progress!)

Most eligible Americans don't even make large enough 401(k) contributions to earn their employer match, let alone maximize their tax savings. If someone contributes to a 529 (and they're rational) we have to assume they've maxed out on all their retirement savings options because they all offer superior benefits.  That sounds like a complex tax break for the wealthy, and I'm no tax-the-rich "progressive"!

In addition, I suspect but cannot prove that the existence of 529 plans will contribute in the long run to the well-above-inflation tuition increases at colleges and universities. (Which may or may not be such a bad thing, but that's for another day...)

[Non-Investment Advice Side Note: If I think there's incompetent oversight, bad management, lousy options and high fees, why do I invest?  Vanguard Inflation Protected Securities Portfolio. Low fees. Competent management.  Inflation linked bonds have TERRIBLE tax treatment, so you want to hold them tax protected.  And, as I said, 529s provide huge capacity for tax deferred investing!]

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