Alabamians have grown accustomed to seeing a top ten ranking when it comes to the College Football Playoff poll. Now Alabama is top ranked in another poll. Morningstar recently released its Morningstar Analyst Ratings for the best 529 college savings plans for 2018. Alabama received a “Silver” ranking, making it one of the Top 8 college savings plans in the country. My partner, Michael Wagner, CPA, CFP®, is here to tell us more about Alabama’s 529 Plan.
Stewart: Why would Alabama residents choose the Alabama’s #8 ranked plan over the #1 (Gold) ranked plan?
Michael: For Alabama residents, there are a few reasons you might choose the Alabama’s CollegeCounts 529 Fund over another state’s Gold ranked plan. For an Alabama resident who files a joint tax return, a deduction can be taken for the first $10,000 contributed to the CollegeCounts 529 Fund on their state tax return. This is like having the State chip in $500 towards your child’s tuition every year you contribute to the 529 plan. Also, if an Alabama resident chooses the CollegeCounts 529 Fund, the money is not taxed at the state level when used for college tuition. 529 plans in other states are taxable at the state level when the funds are withdrawn.
Stewart: What if you already have a 529 plan in another state?
Michael: You can open a CollegeCounts 529 plan and rollover the funds from your existing plan into the Alabama plan. You receive the same tax benefit as if you were contributing new money into the 529 plan. The strategy I like best, if you have more than $10,000 in a plan outside of Alabama, is to roll $10,000 into the Alabama plan this year and then do the same next year. This allows you to receive the $10,000 deduction in multiple years.
Stewart: How many 529 plans does Alabama offer?
Michael: Alabama’s CollegeCounts 529 Fund currently has two types of plans, the Direct-Sold and the Advisor-Sold plans. Both have the same tax advantages, however, the Advisor-Sold has higher fees. The Advisor-Sold utilizes a broker for investment selection and plan maintenance (those higher fees pay the broker’s commission). The Direct-Sold plan is the Morningstar Silver Rated Plan. The Direct-Sold plan has lower fund fees as there are no broker commissions paid.
Stewart: If you elect the Direct-Sold plan, which investment option do you recommend?
Michael: We like the age-based options that automatically changes their asset allocation based on your child’s age. These options start out mostly in equities, then add more and more bonds and cash as your child gets close to college age. The easiest way to sign up for CollegeCounts 529 Fund is online at https://www.collegecounts529.com/.
Stewart: What happens if your child decides not to go to school?
If your child decides not to attend college you can always transfer the funds to another child or relative with no penalty. If there is no one to transfer the 529 plan to you can take the money out and pay tax on the investment gain plus a 10% penalty.