State-sponsored 529 college savings plans offer a flexible, tax-saving way to fund post-high school education, including college, grad school and trade school. The beneficiary can be your child, a grandchild -- even yourself. Among the benefits: easy entry (you can open a 529 account with as little as $25; Investment growth is shielded from taxes; and withdrawals are tax-free when used for qualified education expenses such as tuition, fees and room and board.
Almost every state offers its own 529 plan, each with a specific set of investment offerings, tax benefits and costs. You can invest in any state’s plan—you aren’t limited to the one offered by your state. While the array of options gives you a lot to choose from, deciding which plan to use may feel overwhelming.
A number of websites can help you compare plans, including collegesavings.org and Morningstar.com. Before you consult those sources, here’s a primer on what to consider when selecting a 529 plan:
Fees: A plan with high administrative fees can eat away at the money you’re trying to save for college. That’s why it’s important to shop around for a low-fee plan. “In general, you want to be saving in the plan that has the lowest fees,” says Mark Kantrowitz, publisher of FinAid.org. Kantrowitz recommends seeking a plan with annual expenses of 1 percent or less.
Investment options: The 529 plan you choose should offer investment options that are appropriate to the beneficiary’s time horizon. Kantrowitz suggests looking for an age-based portfolio that gets more conservative over time, similar to a target date retirement fund.
“When the child is young, you can afford to start off aggressively because you have plenty of time to recover from any short-term market swings,” he says—meaning you may be better off choosing investments that favor stocks.
Conversely, when college draws near, you’ll want the portfolio to emphasize bonds in order to protect the savings you’ve built. The 529 plans ranked Gold or Silver by Morningstar typically offer high-quality active investment strategies at a relatively low cost.1
Tax benefits: Your state’s plan may offer tax benefits for saving in it. Thirty-four states and the District of Columbia offer some type of state tax deduction for residents who contribute to their state 529 plan.2 A few, including Arizona and Pennsylvania, offer state tax deductions for contributions in any state’s plan.
The ability to deduct contributions shouldn’t be the sole factor in your decision about which plan to use, however. First, look for plans that combine low fees and appropriate investment choices, then consider your top contenders’ tax benefits. The result will be a savings approach you can feel confident gives you the best opportunity to fund your child’s college education.
Before investing, investors should consider whether their home state or their designated beneficiary's home state offers any state tax or any other benefits that are only available to residents of that state. Any state tax benefits associated with a 529 plan apply only to residents of the state sponsoring the plan. 529 plans value will fluctuate so that an investor's shares, when redeemed may be worth more or less than their original cost.
Investors should consider the investment objectives, risks, and charges and expenses of the plan carefully before investing. An official statement, which contains this and other important information, can be obtained from your financial professional. Please read carefully prior to investing.
Withdrawals may be subject to state income taxes depending on the participant's state of residence. Non-qualified withdrawals are subject to a 10% penalty.
Participation in a 529 plan does not guarantee that contributions and the investment return, if any, will be adequate to cover future tuition and other higher education expenses or that a beneficiary will be admitted to or permitted to continue to attend and institution of higher education.
Neither SunTrust Banks, Inc., nor any of its affiliates underwrite 529 plans.
This article is general in nature and does not constitute legal, tax, or investment advice. SunTrust makes no warranties as to accuracy or completeness of this information, does not endorse any non-SunTrust companies, products, or services described here, and takes no liability for your use of this information.