Ask 4 Questions About College Savings Plans at Banks

Check if tax-advantaged 529 plans are offered and if the bank is affiliated with a brokerage.

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Parents shopping for a college savings account have at least one place they can visit: a local bank. But before putting their money into an account offered by a bank, there are a few things they should know.

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

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

[Understand how to juggle multiple 529 plans.]

But even outside of those six states, banks could still offer an adviser-sold 529 plan, experts say. An adviser-sold plan is a 529 plan that is sold through financial advisers instead of directly through a state agency or program manager. The drawback is that these plans generally have higher fees, but the plans offer more investment choices and one-on-one help from a financial adviser.

Parents who want to find out what the bank is really offering should ask these questions recommended by Fitzgerald and Rob Seltzer, a California-based certified public accountant and 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 can have 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 for federal tax benefits, state matching grants or state tax credits and deductions, says Fitzgerald.

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

The other drawback 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 lower fees 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 can run a direct-sold program on 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 sell the 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 will sell you a 529 plan product, Seltzer says.

This doesn't mean parents will pay 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 encourage the individual to choose that brokerage over another or instead of a direct plan that has lower fees.

Ultimately, savers should look at other plans and consider other advisers as well. Parents shouldn't pick a plan solely because it's sold by their bank, he says.

4. Are there any special features offered by the bank? One advantage to choosing a 529 plan from or affiliated with your bank is that the bank can more easily track a lost electronic payment.

If a parent sets up an automatic transfer from a checking or savings account of a set amount each month to be deposited into a 529 plan, it may be easier and quicker for a bank to track down a payment when it's involved with the 529 plan, Seltzer says.

[Take these steps before opening a 529 plan.]

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