California Gets an A for College Saving Plan

Starting in February, 2020, those investments will be put on a progressive glide path – an industry best practice, said Morningstar – as “it smooths the transitions from stocks to bonds and reduces the risk of making a large shift out of equities just after a market dip, when there’s a potential to lock in losses.”

The plan’s portfolios also rank among the most affordable in the industry within their respective categories.

College savings plans offered by most states allow people to set aside money in mutual funds that grow free of taxes  when used for qualifying education expenses for a child. While they are branded as college savings plans, recent changes in federal legislation now allow ScholarShare money to be used on qualifying K-12 expenses, as well.

ScholarShare, www.scholarshare529.com, offers a number of index and actively managed funds, similar to what investors would see in a workplace 401(k) plan. The program is run by the state treasurer’s office, while most of its $8.3 billion in assets are managed by firms such as TIAA-CREF. 

When you contribute to the ScholarShare College Savings Plan, any account earnings are federal and California income tax-deferred, according to its website. 

In addition, up to $10,000 annually per student, in aggregate from all 529 plans, can be withdrawn free from federal tax if used for tuition expenses at a public, private or religious elementary, middle, or high school.

Contributions to a ScholarShare account may help you reduce the taxable value of your estate. Contributions to the Plan, together with all other gifts from the account owner to the beneficiary, may qualify for an annual federal gift tax exclusion of $15,000 per donor ($30,000 for married contributors), per beneficiary. 

More than 20,000 new ScholarShare 529 accounts were opened this year, bringing the total number of accounts to more than 327,000. Plan assets approach $10 billion, and nearly $3 billion of qualified withdrawals are made for higher education since the plan’s inception. 

Morningstar said it annually rates plans across five key pillars: Process, People, Parent, Price, and Performance Only four state plans besides California’s merit that Gold rating. 

If there is a weak link in ScholarShare’s chain it lies with its tax deductibility. While most states grant a tax deduction for contributions, California has not allowed that practice. It also taxes withdrawals (though not earnings as they are being accumulated.)

The San Francisco Chronicle reported earlier this year that a bill had been introduced to allow state taxpayers a deduction of as much as $10,000 for money they put into ScholarShare. Similar legislation has failed in the past.