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States Plan On Shutting Down Small 529 College Savings Plans

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Are state-run 529 plans — investment accounts that offer tax benefits for saving for educational expenses but with penalties otherwise — worthwhile? I haven’t made up my mind yet. But some investors may be wishing they had chosen other investments. Some 529 plans are being closed because the states are finding them too expensive to run.

States say that by shutting unpopular 529s, they can partner with bigger states to give families more cost-effective savings options. “We don’t have the economies of scale to have a program with low fees and a wide range of investment choices,” says Steve Curry, assistant to the Tennessee state treasurer.

When Wyoming’s state plan closed several years ago, they recommended investors move their funds to Colorado’s plan, but only 17% moved. It’s likely a significant portion of the remaining accounts were withdrawn early for non-educational purposes when the fund closed and were therefore subject to tax and penalties.

Tennessee will be closing its 529 plan this year, and according to USA Today, more states will follow. When they do so, they may recommend investors to move their funds to another state’s 529, and make it fairly easy to do so. I’d be concerned that many investors blindly follow the state’s advice without performing independent research to determine whether the suggested option is the best option.

More states consolidate on 529 college savings plans [USA Today]

Published or updated February 25, 2008. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 1 comment… read it below or add one }

avatar dong

I wish the government would go back to how the law was written. I do think it’s a duplication of effort that States have all these different plans. Obviously it makes sense for the prepaid university plans, but as a general savings plan there’s no need for different plans for each state.

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