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.