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How do I choose a 529 plan?

December 11, 2018

With the growing student loan debt crisis, people are starting to look beyond scholarships and federal financial aid to find alternatives to pay for college. One way to secure your future is the 529 College Savings plan, a tax-advantaged investment plan to help students pay for college. The 529 operates similar to an investment account, but unlike investment accounts are not taxed at a federal level. In addition, some states offer deductions.

What is a 529 Savings Plan?

Individual states operate 529 Savings Plans as well as state education organizations, and educational institutions. Choosing the 529 plan in your state of residence is not a requirement, nor does it always benefit you. A student may reside in California, enroll in Utah’s 529 Plan, and use that plan to attend college in Michigan.

Do I have to choose a 529 Plan in my state of residence?

When choosing a 529 Plan, essential things to consider include who will manage the 529 account, state tax requirements, and the individual rules and regulations of the plan. For example, Utah permits grandparents to give directly to their grandchild’s 529 plan, the state of New York does not. Before selecting a 529 plan, it’s important to consult with a financial advisor to ensure you understand all of its implications. Choosing the wrong 529 plan can lead to penalties and taxes, or a reduced available balance due to fees.

How do I choose a 529 plan?

Before enrolling in a 529 Plan or meeting a financial advisor, you can research on your own to have a good idea of which financial plans may work best for you. From there, a financial advisor can help you narrow down your choices. The following are essential points to consider when choosing a 529 plan:

Tax Deductions

Washington D.C. and more than 30 states offer a deduction based on the amount you save each year. For example, if you live in Arizona, you are entitled to a tax break for investing in any 529 savings plan in the country, but if you live in New Mexico, you will only receive a deduction for investing in the state of New Mexico’s 529 Savings Plan. Some states like California, offer no state deduction for investing in a 529 savings plan.

Account Fees

There are a variety of fees associated with 529 plans including an account opening fee, annual fee, and other plan fees. Before enrolling in a savings program, research all of the possible account fees and weigh that against the growth of your plan. Some states waive plan fees. Utah and Illinois are two states with the lowest fees for their 529 plans.

Direct-Sold or Advisor

You can purchase a direct-sold plan or use an advisor, which will require a fee but may be worth the peace of mind if you don’t have the time to do research. In most cases, it’s best to do your homework and purchase a Direct-Sold plan, particularly if you have knowledge or experience investing.

Investment Options

Do you want to use a plan that offers a wide variety of investments or perhaps one that is FDIC-insured? It’s important to be comfortable with your plan’s investment options before signing up for the risks associated with the plan.

Read Reviews

Reading reviews is an excellent way to determine which plan is right for you. As the saying goes, a happy customer will tell three people, but a dissatisfied customer will tell ten. Reading reviews about 529 savings plan will provide some insight into what individuals wish they knew about their plan before signing up. It’s an efficient way to find out the hard facts that may not be readily available or promoted by the plan.

What are the most popular 529 plans?

Some plans stand out for getting consistently high marks. The Utah's My 529 Plan stands out because of ease-of-use and the ability for grandparents to easily contribute and low fees. Illinois’ Bright Start 529 College Savings Program is also a popular option due to low fees.

Choosing the 529 Plan That’s Right for You

When choosing a 529 Savings Plan, make a list of the features that are most important to you. Evaluate each plan that meets your criteria, but ensure that you aren’t sacrificing one feature for another. For example many low fee plans don’t always offer the best investment options. Making a checklist will reduce the likelihood that you overlook details or features when selecting a 529 plan.