A 529 College Savings Plan is one that allows parents to put aside money for the future higher education expenses of their children. This plan is one of the best ways to save because, unlike most other savings plans, education-related withdrawals are free from federal income tax. Many states have chosen to adopt the same policy and also allow tax-free withdrawals for qualified expenses.
When we had our first son, it was a no brainer to open a 529 plan to save for his college. We have followed suit opening a new plan with each child. Well….almost. Our now two month old doesn’t have one yet, but soon will. 🙂
Note: Not sure how much to save? If not, check out my post that addresses how much you should save for college.
Performance of 529 Plans
Earnings from 529 Savings Plans are based on the performance of its investments, usually mutual funds. These plans are only administered by states. An interesting fact about 529 Plans is that you can choose to invest in one from any state. And almost every state has one. State plans are often different from each other in one or more of the following ways:
- Structure of the plan
- Type of investments offered
- Benefits for out-of-state/in-state investing
Check Your State First
If you are interested in starting a 529 College Savings Plan, you should first look at the plan your state offers. Although most states allow non-residents to invest, there are usually advantages to investing in your own state’s plan including:
- State tax advantages and deductions – some states give tax-free status only to residents
- Matching grants
- Opportunities for scholarships
- State financial aid exemptions
- Creditor protection
Definitely go with your state if it gives deductions and/or credits on your tax return. This state tax break will most likely be a bigger asset than the possible lower fees from another state. The state of Illinois just increased the state tax rate from 3 to 5%, to give me even more incentive to use our state plan. New York, Minnesota, Missouri, and Michigan offer exceptional plans for their residents. Some states are so forward-thinking that they give their residents a state tax break no matter what state plan they invest in. Pennsylvania was the first state to do this.
If your state does not fall into this category and does not offer enough incentives to its residents, there are a number of states with a proven track record. Year after year, these states have had some of the best 529 College Savings Plans:
Some of Best College Savings Plans By State
- Alaska – T. Rower Price College Savings Plan
- Alaska – University of Alaska College Savings Plan
- Michigan – Michigan Education Savings Program
- New York – New York’s 529 College Savings Program (Direct Plan)
- Vermont – Vermont Higher Education Investment Plan
- Maryland – College Savings Plan of Maryland (College Investment Plan)
Some of these plans are direct sold, meaning you purchase the plan directly from the state. This is the way to go as broker-sold plans usually include sales charges, although they offer slightly more investment possibilities. Many of the best plans are managed by Tiaa-Cref, Fidelity, or Vanguard. In fact, those plans generally charge the lowest fees.
Other Factors to Consider
There are multiple factors that will affect return on your investment including:
- How much time do you have? Are you starting a plan when your child is an infant or a junior in high school?
- What sort of fees and other charges will you have to pay?
- What is the tax bracket of your family?
- How much money are you investing?
- Is there a possibility of state tax deductions?
It is amazing that you can choose to invest in a 529 College Savings Plan from almost any state in the country. With such selection, you are sure to find the perfect investment opportunity for you and your college-bound child.