Which 529 Plan Is Best?

Choosing the right 529 plan can be a daunting task for many families. With the rising cost of education, these plans have become a popular method of saving for college due to their tax advantages. But with so many options available, how do you decide which 529 plan is best for you? This article will provide a detailed overview of what 529 plans are, the different types available, and how to evaluate which plan might suit your needs best.

Understanding 529 Plans

What is a 529 Plan?

A 529 plan, named after Section 529 of the Internal Revenue Code, is a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans are sponsored by states, state agencies, or educational institutions and come in two primary forms: college savings plans and prepaid tuition plans.

Types of 529 Plans

1. College Savings Plans: These are the most common type of 529 plans. They function similarly to a retirement savings account, where contributions are invested in mutual funds or similar financial instruments. The account's value changes over time based on the performance of these investments.

2. Prepaid Tuition Plans: These plans allow you to pre-pay all or a portion of in-state public tuition. They lock in current tuition rates, mitigating the impact of future tuition increases. However, prepaid plans typically cover only tuition and fees, not other college expenses like room and board.

Key Benefits of 529 Plans

• Tax Advantages: Earnings in a 529 plan grow federal tax-free and are not taxed when used for qualified education expenses.
• Flexibility: Funds from a 529 plan can typically be used at any accredited college or university nationwide, and sometimes abroad.
• High Contribution Limits: Unlike certain other savings plans, 529 plans have high contribution limits, often exceeding $300,000 per beneficiary.
• Control: The account owner—not the beneficiary—controls the funds throughout the life of the account.

Evaluating the Best 529 Plan

When determining the best 529 plan for you, consider several factors: performance, fees, state income tax benefits, investment options, and more. Here’s a breakdown of what to look for:

529 Plan Performance

• Historical Performance: Review the historical performance of the investment options. Although past performance is not indicative of future results, it can provide insights into fund management and potential risk.
• Target-Date Funds: Many plans offer age-based or target-date funds that automatically adjust the allocation of assets as the beneficiary approaches college age. This option simplifies the investment process by balancing risk and growth over time.

Fees and Expenses

• Management Fees: All plans have fees, including expense ratios for mutual funds and state administrative fees. Lower fees generally result in higher net returns.
• Enrollment Fees: Some plans have enrollment or annual account maintenance fees. These costs can add up, so look for plans that minimize these charges.

State Income Tax Benefits

• Tax Deductions or Credits: Many states offer tax deductions or credits if you enroll in their state’s 529 plan. It’s crucial to check whether these benefits outweigh potentially higher fees in your home state's plan versus a better performing plan from another state.

Investment Options

• Variety of Choices: The best 529 plans offer a wide range of investment options, including age-based portfolios and static options tailored to risk tolerance.
• Financial Advisor Options: If you prefer professional guidance, consider plans that offer advisor-sold options.

Accessibility and Additional Benefits

• Ease of Use: Evaluate the plan’s website and app for features such as automatic contributions, account management, and customer service.
• Scholarship Programs: Some plans offer scholarships or matching grants as additional incentives.

Comparison Table of Notable 529 Plans

Here is a comparison of some well-regarded 529 plans to help guide your decision:

Actionable Steps for Selecting a Plan

1. Assess Your Financial Goals: Define how much you want to save, when you’ll need the funds, and your comfort with investment risk.

2. Research State-Specific Benefits: Investigate whether your state’s plan offers sufficient tax advantages or other benefits worth considering.

3. Analyze Investment Performance and Fees: Utilize online resources and plan websites to compare historical fund performance and associated fees.

4. Consult a Financial Advisor: If you're unsure about your options or investments, professional advice can be helpful.

5. Review Plan Features: Consider the usability of the plan's website, its customer service options, and any additional benefits offered.

Common Questions About 529 Plans

Can 529 Plan Money Be Used for K-12 Tuition?

Yes, under the Tax Cuts and Jobs Act of 2017, you can use up to $10,000 per year from a 529 plan for K-12 tuition.

What Happens If My Child Doesn't Go to College?

If the beneficiary doesn't attend college, you can:

• Change the beneficiary to another eligible family member.
• Withdrawing the money for non-education expenses incurs taxes on earnings and a 10% penalty.

Are There Any Income Limits for Contributing?

There are no income limits for contributing to a 529 plan, making them accessible to everyone.

Final Thoughts

Choosing the right 529 plan is a significant step in preparing for future educational expenses. With careful consideration of factors like investment performance, fees, tax benefits, and plan features, you can select a plan that aligns with your financial goals. It’s advisable to begin saving as early as possible to maximize the benefits offered by compounding growth and tax advantages. For more detailed information and plan comparisons, visit reputable financial advisory sites or consult with a financial advisor to tailor the plan to your needs.