What Should I Look for in Choosing a 529 Plan?
As originally published in Worth
Enrolling in a 529 college savings plan is one of the shrewdest financial moves that parents or grandparents can make. These plans offer significant federal income tax breaks, some- times state tax benefits as well and a low-maintenance, largely self-controlled way to save for college.
Choosing the right one for your needs, however, requires careful consideration. The universe of plans can be overwhelming, with most states offering one or more.
I find that many people choose their home-state 529 plan by default. Don’t automatically assume that your state’s plan is the best choice for your child or grandchild. Most states’ plans are open to residents and nonresidents alike.
Many investors are drawn to the state income tax deductibility, but this may be limited. Nine states’ 529 plans offer no state tax deduction whatsoever. Others allow for only small or modest deductions, or have other limitations. For example, in Maine’s 529 plan, state tax deductions for contributions are capped at $250 and are phased out beginning at $100,000 income, or$200,000 for returns filed jointly.
That said, a growing number of states allow deductions of $10,000 or more, such as my home state of Illinois, where the maximum deduction is $20,000 for joint filers, with no income limit. A table showing the tax deductions by state is available at Finaid.org. Additionally, Arizona, Kansas, Maine, Missouri, Montana and Pennsylvania offer tax “parity” to their residents whereby they may deduct contributions to any state’s 529 plan, including out-of-state plans that may be more attractive.
Beyond any potential tax benefits, I want a 529 plan with low fees, broad diversification options with both active and passive fund choices and access to good investment managers. States have improved their offerings in all those categories in recent years. However, significant differences among the plans remain.
Be wary of fees, in particular. I recommend looking for a plan with no enrollment or application fee, such as the $50 fee assessed by Florida’s plan or $25 by Virginia’s. You also ideally want to avoid an annual account maintenance fee, charged by 17 states’ plans. For example, Arkansas’ iShares 529 Plan charges $10 annually, waived only for accounts with $20,000 or more. A state-by-state listing of plan fees is available at Savingforcollege.com.
Of course, a plan’s investment performance must be considered, too. Want one whose performance has thrived during the volatile last decade? You might consider plans in Alaska, Utah or Maryland, which rank at the top of 10-year performance rankings as compiled by Savingforcollege.com.
By that measure, you might want to avoid plans in Rhode Island (CollegeBoundfund and CollegeBoundfund Direct), Minnesota (Minnesota College Savings Plan) and Kansas (Schwab 529 College Savings Plan), according to Morningstar’s annual study of 529s. Those are the only four plans to receive negative ratings from Morningstar. Just four states’ plans received Morningstar’s highest “Gold Medal” ratings in its 2013 study: the Maryland College Investment Plan, Alaska’s T. Rowe Price College Savings Plan, Nevada’s Vanguard 529 College Savings Plan and the Utah Educational Savings Plan.
So, go ahead and check your state’s 529 plan first to see if it meets the grade on deductions, fees, investment options and recent performance. But don’t limit your search unnecessarily. Better options may exist elsewhere.
The material shown is for informational purposes only and should not be construed as accounting, legal, or tax advice. Altair Advisers LLC is a registered investment adviser with the Securities and Exchange Commission; registration does not imply a certain level of skill or training. While efforts are made to ensure information contained herein is accurate, Altair Advisers cannot guarantee the accuracy of all such information presented.