ASK KIM
Consider Your State's 529 First
by Kimberly Lankford

My broker is pitching me its 529 plan. I've read about these on Kiplinger.com, so I know they're a good deal, but would it be better to invest directly with my state, or invest in the broker's plan?

It's generally a good idea to invest in your state's 529 plan directly, especially if you qualify for a tax break. Unless your broker sells your state's plan, you'll miss out on this tax break.

The NASD is conducting an ongoing investigation that now includes 20 brokerage firms, and they've discovered that a high percentage of people who buy 529s through brokers buy out-of-state plans.

A recent NASD Investor Alert gives an example of a Missouri couple who is persuaded by a broker to invest in another state's plan, then misses out on valuable state income-tax deductions as a result. Missouri lets its residents deduct up to $16,000 in contributions per couple, but only if they've invested in that state's plan. If you're in the 6% state income-tax bracket and invest $10,000, you could miss out on a $600 tax break by investing in another state.

The NASD's investor alert also points out that fees vary a lot from plan to plan, and that broker-sold plans generally cost more than direct-sold plans because of front-end sales loads.

If you're doing the research yourself and don't want to pay extra for the investment advice, you can generally avoid these fees by investing directly in the plans yourself. See our 529 plan map for links to each state's site, which shows you how to invest directly in their plans. The NASD's 529 expense analyzer can help you compare the fees for the plans you're considering.

There are more than 80 state 529 plans to choose from, and some are a much better deal than others. Use our roundup of state 529 plans, including our favorite plans, to compare fees.

The good thing about 529 plans is that there is no limit to how many you can have. If another plan has lower fees (minimal set-up fees and low expenses) and better investment choices, then you may want to invest just enough in your state's plan to capture the income-tax deduction, and invest the rest of your money in another plan.