About state 529 college plans and how to choose between them.

• We're not picking on the pre-paid tuition plans, because that would require a detailed analysis of each colleges' deal. So this page is not about those. You'll need to do your own homework there to see if it's really worth it or not.

• Fee-based financial planners that have been ignoring the college savings markets because you think you can't make money because of 529 plans, now there is a tool for that. All you have to do is learn how to explain these concepts, and you can divert 529 money into accounts you can get well paid from.

• The one big advantage of 529 plans is the "awesome tax deferral," which basically operates similarly to a Roth IRA (but you may also get a state tax deduction if you play the game right).

The math bottom line is that all you have to do is get between 1% and 2% more average annual investment return in a non-529 do-it-yourself discount brokerage account, and you'll probably end up having more spendable money (which is the point of all of this), even after these awesome tax breaks. Download the demo and see for yourself.

The lower market returns are in general, the lower this difference is. If the stock markets only average under 5% annually (like they have for about twenty years now years now - depending on where the S&P 500 is today, you'd have to go back to around 1995 to have averaged more than 5% annually), then this delta (between 529 & DIY) is less than 1%.

If a string of major miracles happen soon and the stock markets go back to averaging more than 10%, then this delta would grow to between 2% to 3%. It's around 1% to 2% with average annual portfolio returns between 6% and 9%. With average long-term equity returns around 2% to 4% (which has been the U.S.'s 21^st century reality), you only need to get less than 0.5% more total return in a non-529 to beat the 529 plan. Total charges, fees, and expenses are usually much more than that in even the very best Vanguard Index fund 529 plans.

As you can see on this demo download, our $20k minimum no-load mutual fund models consistently do better than this 1% to 2% delta over what the average 529 plan returns. If you were to buy our investing models, and then do this, you'd more than likely get this 1% to 2% delta without even trying very hard.

You can also just try doing this: Take the dozen Vanguard Index Funds we maintain in our All-Index Fund Models (after downloading the demo in the link above, look at the returns for the Index Fund Models, which are very static because the funds rarely change). Then add cash to make 13 asset classes. Then equally weight them all (~7.5% each) and put one name each on a piece of paper. Tape all 13 onto a dartboard that spins. Spin the dartboard and then have a monkey throw darts at it until all 13 darts are on the papers. Then just allocate a non-529 do-it-yourself discount brokerage account that way. Chances are better than 50 / 50 that you'll get 1% to 2% better than any 529 plan. That's how pathetic the vast majority of their investment options are - not even accounting for their fees and expenses.

We can build custom model allocations for your 529 plan for $100 after you send a list of current investment options. We were going to make pre-made investor models for all 529 plans, but both the options and investment performance are too well hidden, and then they change too much, so we'll need a fresh list from you. Click this link to read about investing models

Our unique college saving calculator is the one and only financial plan software tool that actually does this math. Because of these low equity returns, this 1% to 2% difference is also about the same delta needed to win long-term over all traditional forms of IRAs, Roth IRAs, unmatched 401(k)s, and of course all forms of whole life insurance and all forms of annuities.

This is all because when it comes to the distribution phase, the vast majority of the withdrawals come from basis (return of the original money you invested), and not "profit" (AKA unrealized capital gains). These distributions amounts are NOT taxed at all. This is so even at the highest tax rates.

Now, if your lights are turned on, you're correctly thinking, "Yeah that's true in 529 plans because the time frame is much shorter than IRAs, and you're assuming paltry 21^st century average investment returns." You are correct, but that's just the way life is now.

It should be obvious that if you average 0% rate of return, then there will be zero profits, thus also zero taxes to pay, and therefore the value of any tax shelter would also be zero. On the other hand, if you averaged 50% annual total return, you'll be paying tons of taxes, and the value of any tax wrapper would be gynormous. So just apply your estimates for the long-term average rate of return of the equity markets over the next decade, do the math, and then you'll see why the value of a 529 tax wrapper (or IRA, Roth IRA, 401k, or any form of annuity or whole life product) is mostly worthless - considering the fleecing via their never-ending parades of charges, commissions, fees, and expenses.

But don't despair - all you have to do is don't buy into them, and invest in a non-qualified taxable self-directed online discount brokerage account. It's easy; really it is, just ask someone that has one and you'll see, then you will see too!

Does any rational investor think there's going to be the series of major miracles needed to have the equity markets even go back to averaging over 8% annually anymore? Capitulate, it's not going to happen more than a lucky year or two here and there. The days of long-term (rolling five-year or more) averages of 10% returns on the S&P 500 are definitely over forever. The sooner you g et over all of that kind of hope, the better off you'll be. Just look at the long-term S&P 500 returns on this table - they're not even 5%. Most all of the equity markets are at the same levels they were over a dozen years ago - and there's probably nothing coming to turn any of that around in our lifetimes.

Download the college savings plan demo showing the reality of what most people will do, and what they'll actually get - which is getting 3% long-term in a 529 plan after paying 5.5% front-end loads (e.g., a typical American Funds 529 plan). The DIY plan here also returns a whole 3%, so it's comparing apples-to-apples as best as possible.

As you can see, the bottom-line results (between 539 and DIY) are EXACTLY the same. Yes, this is even after all of the wonderful tax breaks from the 529 plan. This proves that when long-term investing returns are low enough, the benefits of most all tax-wrappers are useless. Then consider when you invest your college funds yourself, you can most always do much better than what you're stuck with in 99% of all 529 plans (just by having a monkey throw darts are several Vanguard index funds).

If you think you're going to get much more than this, then consider this:

At the time of this writing (Jan '12 using Dec '11 data), you'd have to go all the way back to June '97 to have the S&P 500 average more than 3% annually. That's over fourteen years ago - a historic low since the beginning of time. Things were never even this bad in any such time frame, including the Great Depression, or the third greatest in the 1800's. For the one and only time in history, you would have made more money than investing in the U.S. stock market by rolling over the lamest investment on the planet - Three-month Treasury CDs. Graphs showing this data is pasted below.

If you can't read them, then you can download them from these two links, then open with Windows Picture and Fax Viewer:

Average S&P 500 Returns since the last century

Average Three-month Treasury CD returns since the last century

So with the investment returns of our new reality, the amount of withdrawal taxes paid is a mere pittance compared to what traditional wisdom has led you to believe. Also, the taxation of dividends and realized capital gains distributions along the way in a non-qualified account is also an even smaller mere pittance - much much less than advertised. This is partly due to near-zero interest rates on just about everything, and then the drastically reduced capital gains distributions in mutual funds (profits).

So the bottom line after finally doing the match correctly, is that the tax advantages of just about every kind of qualified tax wrapper is about one quarter of what you, and everyone else, have postulated since the beginning of time. They're just using 20^th century logic combined with 21^st century tax rates and investment returns. Capitulate - none of that works like it did anymore.

If you're thinking now that your brilliant market timing and/or stock / ETF picking abilities will do better than this, then you're just deluding yourself - they won't.

Back in the "good 'ol days of high everything" (GDP growth, taxes, inflation, interest rates, equity returns, employment, incomes, population growth, and hope in general), the qualified vs. non-qualified race was close. Now it's not even close anymore. It takes decades of being in an IRA to reap significant monetary rewards these days with low single-digit returns. This makes the real value of all government-sponsored tax shelters designed to give investors "an incentive to invest" about half of what they were in the 20^th century.

Things just change, and you should still invest; but these days doing it all yourself without the qualified tax wrapper in a self-directed discount brokerage account makes a lot more sense than it once did.

Just being able to tap your assets whenever you need to without the huge tax penalties makes up for the greatly reduced tax advantages. Face it, there's going to be a lot more "financial hardships and emergencies" now compared to the good 'ol days. In other words, you'll need to keep your money more liquid going forward. Investing in 529 plans, IRAs, and all forms of whole life insurance and/or annuities are the direct opposite of liquid. So just don't do that anymore, it's as simple as that.

• Next, you can only spend 529 money on "qualified expenses," like tuition, to get these wonderful tax breaks. Rent, food, travel, beer, and most all living expenses of an actual student are just "not 529 qualified." As you know, these are usually way more than qualified expenses. You can't even buy the computer needed to do homework as a qualified expense anymore. Most things in this regard are only getting worse, not better on any front.

• As you can read below, the investment options, if any, are usually even more terrible with 529 plans than with most 401(k) plans. Add to that, you'll have much less control than with even the worst 401(k) plan with most 529 plans.

• As far as the "Age-Based Plans" (AKA ABIO or Years to Enrollment Plans) that automatically allocate more into bonds and less into stocks when college nears, you'll probably do way better than any of those by using our Conservative High-Income Model (CHIM). Just move into that six months before the student goes to college, and you'll have done something much more intelligent than most any Age-Based Plan would have done on their lame autopilot. Just do your homework on yields alone and you'll see (call and ask what their current yields are for students currently in college, then compare to the current CHIM yields).

• Last, but never least, 529 college plans are NOT at all free! They CHARGE YOU STIFF FEES to invest in them. Then there's the usual parade of front-end loads, commissions, usury 12b-1 fees on B- and C-shares, this that and the other. As you can read below, 529 Plans are a creature of "Wall Street innovation," so you will NOT get away unfleeced with any of them, period!

The only way to not waste 0.5% to 2.5%+ annually on all of these usual shenanigans is to invest DIY using something like our no-load mutual fund models, our index fund models, or something similar, and then keep trading to the bare minimum.

0.5% in 529 fees and expenses was a pittance to be ignored in the 20^th century when you could get 10% average annual returns just by falling out of bed in the morning. But not now when you'll be lucky to average 5% annually on your money. Fees of 0.5% when you were averaging 12% was only 4.2% of your return wasted. At 5% it's 10% of your return that's wasted. The long-term averages of the equity markets over the last dozen years has barely been 3%. So just do this simple math homework, and you'll see that you're making little-to-no money anymore in most 529 plans just because of all of the combined $25 charges, fees, expenses, commissions, this that and the other. It's getting to the point where total fees, charges, and expenses on 529 plans are in the 25% to 50% of your profits range. When this happens, the value of the awesome tax shelter is almost non-existent.

As you can see on this free demo's Input sheet (cell A44), the DIY plan used the same 3% initial mutual fund front-end load / commission as the 529 plan. If you invested in no-load mutual funds, then you would not pay this, and this reduces the amount of average annual return needed to be at par with the 529 by 0.5%.

So when you add this all up, there is usually NO REAL BENEFIT in using 529 savings plans, compared to the lower fees, total control, total liquidity, no restrictions, unlimited investment options, and "it doesn't matter from a tax-standpoint what Junior spends the money on - tuition or beer," because it's all taxed the same (barely anything to tax and then hardly taxed at all these days).

So fee-based financial planners, all you need to do is buy the college saving calculator, read the directions, learn how to present this complex information better to people, and you can tap into the huge new college savings markets that you totally gave up on in the past.

Once you buy a supported college calculator, then after you log into your state plan's website, you'll know the hidden list of investment options, track record of investment performance, and their actual charges, fees, and expenses. Then we'll supply you with both the "Offset Factor" and an Expense factor to input.

So if a plan has an Offset Factor of 3%, then that's how much more return is guesstimated that you'll probably get by having a monkey throw darts at a dozen Vanguard Index funds in a discount brokerage account, over that 529 plan's pathetic list of investment options.

As you'll see, when you add the Offset Factor to the total 529 plan expense factor (that is to be input into cell B21 of the Input sheet), then you'll get why this rant is here and why you should avoid most all 529 plans these days.

Every 529 plan costs money to use, so you'll know what the bottom line really is accounting for all "hidden fees and expenses" - like usury 12b-1 fees on mutual fund B- and C-shares, AND the poorly performing investment options. We won't know until you can log in and tell us, because the information is a well-hidden secret, and it changes all the time.

So if you bought support, then after you supply us with the current information, then we'll help you input it all (even down to the $25 initial setup fee) so everything is accounted for.

The bottom line is that most of the time, when you add the Offset Factor to the Expenses Factor, it's a no-brainer that you will probably be much better off "doing-it-yourself" in a non-529 discount brokerage account - and yes this is even AFTER all of the "awesome tax breaks" of 529 savings plans. All of this is explained in great detail on this page (and nowhere else).

• You know things are really bad when FINRA issues an investor alert, as you can read on this Word docx, where we're accumulating useful information. This and this are must reads if you either are a 529 investor, or are thinking about it.

This FINRA link calculates 529 fees and expenses for free, but you'll have to know them in advance of using it, which is THE problem. Another Wall Street innovation is keeping ALL of this information as hidden as possible to make it as easy as possible for them to keep the fleecing of the sheeple going. We're still looking for a place that discloses fees and expenses, and will post it here when it's found (it won't be).

Just the fact that all of this information about fees, expenses, funding options (the actual mutual funds you can buy), and investment performance is being kept well locked up and hidden until AFTER you pay should be enough to make your robot wave his arms and go, "Warning! Extreme Danger Will Robinson!!!" This metaphor is used because the sheeple are most easily fleeced when they remain "Lost in Space." In this case, cyberspace, is AKA the Internet.

You also know things are bad when Waddell & Reed even has a pre-packaged 529 plan! If you don't know, according to most advisers (people in the know), W&R has long been considered to be the sorriest Black Hat joke in the biz (trivia: these are also the bozos that triggered the Flash Crash of May '10).

Here's what We Offer Regarding 529 College Savings Plans

• We can build custom model allocations for your 529 plan for $100 after you send a list of current investment options. We were going to make pre-made investor models for all 529 plans, but both the options and investment performance are too well-hidden, and then they change way too much, so we'll need a fresh list from you. Click this link to read about investing models.

• The college calculators account for all three factors needed to evaluate the difference between not using a 529 plan, and using one. They have all of the usual manual override functions needed to allow you to model and account for any and all Real World situations. These three factors are:

1) The difference in investment growth rates you'll probably get between DIY and 529. Just input the difference in forecasted returns from the Offset Factor, and everything is automatically calculated.

2) The true benefits of the 529 tax shelter in great detail, so you can see they're not nearly significant enough to warrant their expenses, paperwork, tax / legal annoyances, lack of liquidity, and lack of control limitations (e.g., extreme lack of decent investment choices).

3) All 529 plan fees (which further greatly reduce your investment growth rates).

As usual, this is the only place you can visit where actual logic and math (and not just marketing hype, the desire to profit greatly from your savings account, or just naive wishful thinking) were used to resolve all of these debates and opinions once and for all. Knowing the truth behind all of these deals may be the crucial factor in your student having enough money to graduate or not.

More on what the Deal is with 529 College Savings Plans

With 529 plans, you are called the "account holder" and the student is called the "beneficiary."

Savings are called "contributions," which is the same as in 401(k) plans.

Yes, you can fire your old 529 Plan and buy into a new one. Some plans have fees for this (and for just canceling their whole deal, big surprise), but some of the better ones don't. So if you already have a 529 plan, and want to use a different plan, then it's just some paperwork and maybe a few bucks to roll it over (just like an IRA).

Age-based automatic investment plans are where someone else is making the investment and asset allocation decisions for you. You're basically trusting them to become more conservative with the money as college approaches. This is the same thing as "Target Date investing" in retirement plans. These investment strategies should always be avoided, as explained in detail in our Money eBook. Just reading the directions for our models and DIY is most always better than trusting any kind of "autopilot program" like these.

You basically don't care about getting the highest rate of return when the money is needed to pay bills. What you care about is getting the highest yield so you can minimize the selling of shares as much as possible, while repositioning investments to be much safer than in the accumulation phase. This is similar to what investors do when they retire. There's more explanation of how this works on the Conservative High Income Model text on this page.

The actual 529 plan doesn't do much to make the money needed in the future to send someone to college. The plan is just a tax-shelter wrapper that costs you money to use.

The IRS set up Section 529 guidelines and then most all of the usual financial services corporations are then used to set them up and administer everything. So in order to get a plan, you first have to choose one, and then you're just stuck with however they're managing it going forward.

We were going to make a fuss about making optimized investing models for all 529 plans in all 50 states. But then THE roadblock immediately appeared: One can only self-allocate in a few of the states' plans. With all of the rest of the plans, you're stuck eating only with what they feed you (and they're not good).

This is an example of, "Fool me once shame on you, fool me twice, shame on me." But this time, it's not investors that were fooled and had to learn lessons from the school of hard knocks. It was the financial services industry this time.

Late in the 20^th century (~'97) when these laws were being made and passed, the usual financial marketers saw an opportunity to fix the huge mistakes they made when similar ancient laws were being made regarding 401)k)s / 403(b)s / 457s and similar retirement plans.

With 401(k)s, there are usually always ways to DIY (do it yourself) when it comes to picking the investments you want, and then divvying the money up between them (AKA using asset allocation, or for dummies that think they have magic powers to predict the future, stock or ETF trading). Giving investors this kind of control means there's less for Wall Street to feed off of, so that just couldn't happen again this time when passing 529 plan laws.

When investors are allowed to think for themselves, this "cuts out the middleman." While this is great for the investor, not so much for the middle men (Wall Street). So they lost out big time in these retirement markets.

But when the new 529 plan market opened up, they all were not about to be fooled again. So they put an almost total lock-out on all of this DIY investing.

What they did is make things so most all 529 plans have to be invested in a pre-made investment portfolio - created, implemented, and maintained by the same marketing groups that do just about everything else in the industry. This way, they can make way more money, while ensuring investors only get the same risky unbalanced mediocre returns. In other words, you can rarely control or self-direct the investments inside most 529 savings plans.

What you're stuck with in 529 college savings plans are pre-packaged deals where the only winners are Wall Street. The enticing names of most of these deals are: Age-based portfolios, age-based strategy, years to enrollment options, multi-fund portfolios, enrollment-based portfolios, lifestyle portfolios, year-of-enrollment portfolios, individual-fund portfolios, managed allocation option, static portfolios, active portfolios, equity option, balanced option, asset-allocation options, fund-of-funds asset allocation option, years-to-college option, automatic allocation choice, etc.

ALL of these names mean the same thing - they're just the same mediocre mutual funds wrapped up in the most profitable wrapper, and then given an impressive-sounding name to further entice you into signing up today.

What they really are is just a better way for Wall Street to maximize profits in this market, while giving investors no control over anything. So you're losing on all fronts with these deals:

1) You gave up investment control to the marketers,

2) you're stuck paying them stiff fees for the privilege of doing this work for you, and

3) as these college calculators show - when properly analyzed, the tax advantages of 529 plans in general are not worth doing any of this type of 529 investing in the first place.

4) Then the tax breaks you get are not free, a huge cost is that you're stuck like a sheeple in the jaws of the wolves.

These marketers wish they had the same lock on 401(k) plans, but they were not invited to that sausage-making party. They learned those lessons well, and didn't repeat the same mistakes with 529 college saving plans.

We looked for lists of investment options online, and they'll all hidden. This is because they don't want people like us doing any real intelligent work comparing and optimizing plan performance. All you have to do is hide the data and facts, and then the analysis and conclusions can't be published.

The biggest fallacy when looking at this from a naive point of view is thinking that if you're in a 35% tax bracket all taxable events will be taxed at 35%. This is incorrect. The percentage of money being taxed is usually less than half of this rate. So with the actual numbers you'll have the evidence needed to stop "letting the tax tail wave the portfolio dog," as they say.

We can build custom model allocations for your 529 plan for $100 after you send a list of current investment options. We were going to make pre-made investor models for all 529 plans, but both the options and investment performance are too hidden, and then they change too much, so we'll need a fresh list from you. Click this link to read about investing models

Read why Dollar Cost Averaging techniques should not be used with 529 plans

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