With student loan debt reach record levels, American families are seeking more ways to help their children save for higher education. One solid option is investing in a 529 college savings plan.
What is a 529 Plan?
Each state, except Wyoming, sponsors at least one of these savings vehicles, as does Washington, D.C. Money you contribute to these plans comes from after-tax dollars, so your contributions can reduce your taxable income. Your money also grows tax-free. And you won’t face any taxes if you withdraw money for 529 qualified educational expenses like tuition.
Some states allow you to take additional tax deductions or credits based on how much you contribute. But the great thing is that you’re not limited to investing in the 529 plan sponsored by your state. You’re free to enroll in any program you wish. With that said, not all 529 plans are created equal. Some charge high fees and offer poorly-performing investment options.
How to Pick a 529 Plan
Generally, there are two types of 529 plans — prepaid tuition plans and education savings plan. Prepaid tuition plans allow you to essentially purchase credits at certain participating schools, while education savings plans lets you open an account that can be used for a variety of future educational payments. The first thing you’ll need to do is pick which of these types of plans you want to use.
After you’ve made that choice, consider the specific investment options and contribution rules that each plan offers. To make it a bit easier, we’ve broken down some of the best plane below.
Utah 529 Plan (My529)
Unlike several 529 plans, the direct-sold Utah 529 plan requires no minimum contribution. You can open an account with as little or as much as you’d like. From there, you can contribute up to $446,000. This stands as one of the highest allowed 529 contributions in the country. And once you reach that level, your money still grows tax-free. Utah residents in particular may take a 5% income tax credit on their contributions up to a certain limit.
In addition, the My529 Plan offers a diverse range of investment options. And you don’t have to be an expert in finance to invest in this plan. For instance, you can contribute toward age-based investment options. These portfolios automatically change their asset allocation to generally become less risky as your child approaches college. The idea here is that you should be more cautious as you approach the years when your child would need his or her savings the most.
However, the Utah 529 plan gives you a little more control over asset allocation than the typical 529 plan. It offers age-based options based on specific risk levels. For example, you can invest in an age-based conservative or aggressive option. The latter will invest a larger portion of your money on more growth-oriented investments like stock funds. In addition, you can choose from age-based aggressive global or domestic funds. The former option diversifies your investments with domestic and non-domestic funds. You can also build your own portfolio with static investment options that keep a set asset-allocation or customized investment options.
If you’re not sure what your risk tolerance is, you can use our asset allocation calculator. It helps you visualize a potential investment mix based on your preferences.
Overall, the My529 Plan offers something for all types of savers. Most investment options are also built with low-cost index funds from Vanguard and more actively-managed options from DFA Funds. Total annual asset-based fees for portfolios span from just 0.150% to 0.192%. And if you’re a Utah resident, you can invest in the Public Treasurers Investment Fund with no total annual-asset based fee.
Virginia 529 Plan (Invest529)
Investment-research firm MorningStar awarded the the Virginia Invest529 Plan a Gold rating for three consecutive years.
In fact, this Virginia 529 plan stands as one of most fee-friendly options in the country. Estimated expense ratios for portfolios range from 0.10% to 0.77%. Some plans charge fees that climb higher than 1% for similarly structured investment options. And to boost their savings, Virginia’s residents can deduct up to $4,000 in contributions from individual state income taxes each year.
In addition, the Virginia 529 plan offers a diverse range of investment options, including passive and actively-managed static portfolios. Actively-managed funds aim to beat the market as opposed to passively managed options, which tend to track individual indexes of a certain asset class such as international stocks or high-yield bonds. Plus, the plan also offers a real-estate investment trust (REIT) portfolio. And unlike with several other 529 plans, you can also invest in an FDIC-insured portfolio. Just like FDIC-protected bank accounts, this option protects your funds up to $250,000 in the unlikely event the plan shuts down entirely. You can even invest in a Socially Targeted Investment portfolio. This option aims to invest in securities from firms deemed socially responsible.
And when you open an account with the Virginia 529 plan, you become a member of the Smart Savers Club. This program allows you to take advantage of exclusive rewards and bonuses.
Illinois 529 Plan (Bright Start)
The Illinois 529 plan allows state residents to deduct up to $10,000 in contributions from their state income taxes per year.
The plan also stands out for its robust investment menu. For instance, it’s one of the few plans that allow you to invest in multi-firm target portfolios. These options keep a set asset-allocation. However, they utilize active and passive investing strategies deployed by well-established firms including BlackRock, T. Rowe Price and DFA. Index target portfolios follow a passive strategy and are composed of low-fee Vanguard funds. In addition, you can contribute toward age-based portfolios that follow specific risk tracks. These are conservative, moderate and aggressive. Or, you can build your own investment option using individual portfolios that offer exposure to asset classes like real estate, fixed income and international equity.
Plus, the Illinois 529 plan features very reasonable fees. Total expense ratios stretch from about 0.12% to 0.83%.
Nevada 529 Plan (Vanguard 529 Plan)
You can enroll in one of five different Nevada 529 plans. But the one that stands out is the Nevada Vanguard 529 College Savings Plan. According to Morningstar, this option remains the lowest-cost 529 plan run by Vanguard that “reflects the firm’s best thinking.”
In addition, the plan is recognized for its low fees. Total annual asset-based fees sink to as low as 0.16% and stretch up to only 0.44%. It also offers a diverse investment menu. You can choose from age-based options on three different risk tracks: conservative, moderate and aggressive. You can also design your own investment option using several different stand-alone index funds and actively-managed ones.
Furthermore, this Vanguard 529 plan also allows you to enroll in programs designed to boost your savings. For instance, the Ugift program makes it easy for you to request donations from friends and family during special events like your child’s birthday. The Upromise program helps you earn rewards when you make purchases at popular retailers or restaurants. You can then easily transfer these rewards directly to your 529 plan account.
South Carolina 529 Plan (FutureScholar South Carolina 529 College Savings Plan)
South Carolina’s Future Scholar 529 Plan allows state residents to deduct up to $500,000 in contributions from their state tax returns each year. That’s nearly unheard of in the 529 industry. It makes the South Carolina 529 Plan among the most generous in the nation when it comes to state tax benefits.
In addition, the plan also charges very reasonable fees. Unlike several plans, the South Carolina 529 College Savings Plan charges no program management fee or account fee. In most cases, managers factor these fees into the total annual asset-based fee for each portfolio. However, total portfolio fees for the South Carolina 529 Plan span from only 0.02% to 0.25%. You can also invest in a Bank Deposit Portfolio with no asset-based fees.
While your investment options won’t include age-based portfolios, you can still select from a diverse investment menu. For example, the South Carolina 529 Plan is one of the few that offers portfolios made from low-cost exchange-traded funds (ETFs).
Michigan 529 Plan (Michigan Education Savings Program)
The Michigan 529 plan earned a silver ranking from Morningstar. Nonetheless, it still provides notable benefits and perks. For example, its investment menu contains a guaranteed investment option. This portfolio charges no annual asset-based fee. It’s designed for investors with very low risk tolerances or those whose beneficiaries are close to the college years. It aims to preserve capital and provide a decent return by investing entirely in a funding agreement issued by TIAA-CREF Life to the Michigan Department of Treasury. According to the MESP website, “the minimum effective annual interest rate will be neither less than 1% norm greater than 3% at any time.”
In addition, you can invest in multi-fund portfolios designed for different risk profiles and objectives. Total annual asset-based fees for portfolios, except the funding agreement, range from 0.12% to 0.24%.
You can open a Michigan 529 plan with $25, or $15 if you establish an automatic payroll deduction. Furthermore, the plan makes it easy to request eGifts. Friends and family can contribute directly toward your 529 plan account.
Maryland 529 Plan (Maryland College Investment Plan)
Even though the Maryland 529 Plan charges slightly higher fees than most of the plans on our list, an analysis by SavingforCollege ranked it among the five top-performing 529 plans in the country.
Leading asset-management firm T. Rowe Price manages underlying funds in the plan’s portfolios. But all you need to open an account is $25. Moving forward, you can contribute up to $350,000 toward your account. And Maryland residents can deduct up to $2,500 in contributions from their state income tax per year ($5,000 for couples filing jointly).
One of your investment options includes a U.S. Treasury Money Market Portfolio designed for low-risk investors. But you can also contribute toward Enrollment-Based Portfolio options. These change their asset allocation automatically to become less risky as your child approaches the college years.
California 529 Plan (ScholarShare)
Even though the direct-sold California 529 plan doesn’t offer state-specific tax breaks, it received a 5/5 star rating from SavingforCollege. This website rates 529 plans each year. It made the top of the list based on performance. Well-established firm TIAA-CREF manages underlying funds in the plan’s portfolio.
The plan includes age-based, multi-fund, and single-fund portfolios as well as a guaranteed investment option. And the program manager keeps costs down. Total annual asset-based fees stretch from 0.07% to 0.57%. In fact, the menu contains one of the lowest non-guaranteed portfolio options in any 529 plan.
New York 529 Plan (New York’s 529 College Saving Program)
The New York 592 College Savings Program recently reduced the total annual asset-based fee on all its portfolios to 0.13%. The moves makes the New York 529 plan one of the most inexpensive in the nation. In addition, New York families can deduct up to $10,000 from their state income tax each year.
And unlike most 529 plans, the program doesn’t charge additional fees for out-of-state participants. Your investment options include three age-based portfolios based on specific risk profiles. In addition, you can build your own investment mix using individual portfolios. These provide exposure to asset classes like stock funds, short-term reserves and mixes of multiple classes.
You can open a New York 529 plan with as small an amount of money as you’d like. And you can contribute up to $500,000. This is one of the largest 529 maximum contribution limits in the country.
Furthermore, the New York 529 College Savings Program allows employers to set up payroll deductions toward employees’ 529 plan accounts at no cost to the company.
Investing in a 529 plan is a great way to start saving for your child’s future college education as soon as possible, and you enjoy some decent tax breaks, to boot. In addition, your child can still qualify for financial aid even if you’ve built a hefty 529 account balance over the years. Almost all states sponsor at least one of these plans, but they’re not all great. The best 529 plans offer very generous 529 plan benefits, major tax incentives and high 529 plan contribution limits. Moreover, they provide a diverse investment menu. And no rule says you have to invest in one sponsored by your state. So make sure you shop around.
Tips on 529 Plan Investing
- Tax breaks are some of the strongest incentives for investing in a 529 plan. However, there are some 529 plan rules you must follow in order to make the most out of your savings. For instance, you have to use your withdrawals on 529 plan qualified expenses. Otherwise, you’ll face some major tax penalties.
- If you’re interested in learning more, we developed a report on all about college savings plans.
- Any time you’re making important college savings decisions, it’s important to seek out the help of a financial advisor. If you’ve yet to work with one, you can use our SmartAsset financial advisor matching tool. It gives you access to the profiles of up to three financial advisors in your area who can help. You can review their qualifications and expertise before deciding to work with one.
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