Claiming that a high percentage of people who buy 529 plans through brokers buy out-of-state plans, the NASD has issued an investor alert urging care in selecting these plans.

By buying out-of-state college savings plans, experts warn, investors sometimes miss out on important in-state tax advantages. Plus, they could pay higher fees through brokers or financial advisors. The alert, issued on September 10, follows an NASD examination sweep that involves at least 20 brokerage firms.

Every state offers at least one 529 plan. There are currently more than 80 college savings plans. "But no two plans are the same," said NASD Vice Chairman Mary Schapiro. "Fees and expenses vary greatly, and high fees and expenses can cut significantly into your returns."

The alert notes that contribution limits and state tax advantages vary by state. State tax benefits may depend on whether the investor is a resident of the state sponsoring the plan. Investment options, fees and expenses also vary greatly among plans offered within the same state.

The NASD voices concern that some brokerage firms and advisors offer only one or a very limited number of 529 plans. Options may not include the investor's in-state college savings plan or provide an opportunity to invest in college savings plans issued by other states even though those other plans may have lower sales loads, according to NASD.

The alert warns that broker-sold plans often contain sales loads and higher fees and expenses than plans purchased directly from the state. The following states, the alert says, offer tax deductions or credits to in-state investors: Colorado, District of Columbia, Georgia, Idaho, Illinois, Iowa, Kansas, Louisiana, Maryland, Michigan, Mississippi, Missouri, Montana, Nebraska, New Mexico, New York, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Utah, Vermont, Virginia, West Virginia and Wisconsin.

"Several states impose taxes on qualified withdrawals from out-of-state plans, and a few tax earnings on out-of-state plans," the NASD says. New York, it says, even "recaptures state income tax deductions that were given to state residents who move money from the New York college savings plan to a college savings plan in another state."

Investors should check "Internal Revenue Service Publication 970, Tax Benefits for Higher Education" to better understand complicated tax moves, the alert says.

The NASD, which provides a 529 plan analyzer at its Web site,, urges wariness of 529 plan ratings. Some, it says, "appear to give little weight to state tax benefits or low expenses." The NASD advises that prepaid tuition plans, educational savings accounts, custodial accounts and savings bonds also be considered.

Joseph Hurley, CEO and founder for LLC in Pittsford, N.Y., says advisors are between a rock and a hard place with 529 plans. "In many cases, you really can't advise your client on investments that are not approved by your broker-dealer," he said. "But most advisors should, and they are telling clients that there is an in-state 529 plan they might want to consider."

"Assess the value of the in-state tax deduction," Hurley adds. Hurley says the significance of in-state tax benefits often depends on how old the child is. "The in-state tax benefit is more significant as the period that the investment in the account is reduced," Hurley said. The reason: If a child already is in college, there's less time for investment performance in an out-of-state 529 plan to overcome the value of an in-state plan's tax benefit.

Beware, he says, that the law allowing for tax-free withdrawals if used for college expenses still is slated to sunset at the end of 2010. Several groups, however, are pushing to have tax-free withdrawals made permanent.