Ask 4 Questions About College Savings Plans at Banks

Parents shouldn’t pick a college savings excogitatesolely because it’s sold by their bank.

 

Parents shopping for a college savings taradiddleadjudgeat least one place they offervisit: a local bank. But before putting their money into an account offered by a bank, thereargona a couple of(prenominal)things they should know.

 

 

"Your bank maysay, 'We renta college savings plan,' which may be true and legal and okay," says College Savings Plans Network leadMike Fitzgerald, but it may or not be a tax-advantaged 529 plan.

Only six states offer 529 plans where banks act as the weapons platformmanager, the direct contact for consumers: Arizona, Indiana, Montana, Nebraska, Alabama and Illinois.

[Understand how to juggle multiple 529 plans.]

But even sooutside of those six states, banks could still offer an adviser-sold 529 plan, experts say. An adviser-soldbroadcastis a 529 plan that is sold through financial advisers instead of at one timethrough a state agency or computer programmemanager. The drawback is that these plans generally have higher fees, but the plans offer more(prenominal)investment choices and one-on-one help from a financial adviser.

Parents who deficiencyto find out what the bank is really offering should adoptthese questions recommended by Fitzgerald and Rob Seltzer, a California-based certified public comptrollerand personal financial specialist.

1. Is it a 529 plan? The first question a parent should ask is whether the product the bank is offering is a 529 plan. A college savings plan that isn't a 529 plan rout outhave all the same investment ingredients such as savings, certificates of deposits and mutual funds. But because it's not an official 529 plan, it doesn't qualify forfederal officialtax benefits, state matching grants or state evaluatecredits and deductions, says Fitzgerald.

[Learn how to earn high interest with a 529 plan.]

The otherwisedrawback of a college savings account that's not a 529 plan is that the account could have a larger effect on a student's financial aid award if it's in the student's name, he says.

This is because children's assets and income impact financial aid awards more than a parent's income and assets. If a parent starts a 529 plan for a child, the money in the account is counted as parental assets.

2. Is it a direct-sold plan? A direct-sold plan is a plan offered directly by the state, and which generally has depressfees on investments, Fitzgerald says. The alternative to a direct plan is an adviser-sold plan that generally has commission fees built into the cost because the investment plans are sold by advisers. Banks give noticerun a direct-sold curriculumon behalf of the state.

First National Bank of Omaha, for example, is the program manager for Nebraska's direct-sold 529 plan. Parents can find out who manages their state's 529 plans at collegesavings.org.

3. Is the bank affiliated with a brokerage? Banks generally handle college savings plans that aren't 529 plans, whereas affiliate brokerages sometimes dole outthe 529 plans. If a 529 plan is an adviser-sold plan, your bank could have investment advisers who can enroll you in a 529 plan or have a business relationship with a brokerage that testamentsell you a 529 plan product, Seltzer says.

This doesn't supposeparents go awaypay higher fees than they would with another adviser-sold plan, but it can mean your bank may be splitting the commission on your investments, he says.

That could give the bank a reason to back upthe individual to choose that brokerage over another or instead of a direct plan that has lower fees.

Corrected 6/26/13: A previous version of this article misstated Mike Fitzgerald’s position.

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Materials taken from US News