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A 529 plan is a tax advantage college savings account. Choosing to save for college in a 529 plan might give you benefits on your state taxes, tuition rate guarantees and even matching funds from some states. However not all 529 plans are created equal. Some plans may give little benefit other than tax deferral and come with relatively high fees, poor selection of investment options and low performance. Your state may have one 529 plan or a few options so you may need to make a choice. It may even make sense to chose an out of state plan rather than going with your states plan.
To evaluate 529 plans you should know what to look for in a plan and how to compare them. Lets start by looking at what you should look for in a plan. There are a few key things to consider when comparing 529s. The style of a 529 plan, the amount of various fees, investment options available and the performance of the investments are all important elements in comparing 529s. Each of these will be discussed below.
Style of 529 plans
There are a couple of key things that differentiate the styles of 529 plans. The plan can be a prepaid tuition system or purchasing fund investments.
For the prepaid tuition plans, buying into the plan will guarantee prepaid tuition at a given current cost. If you’re purchasing funds investments, then it will work like a 401k or IRA where you buy your choice of certain investments which will hopefully go up in value but might lose value short term.
The other key differentiators for 529 plans is whether they are direct investment or adviser investment. With direct investment, the plan is run by a state agency and you invest with the plan directly. With adviser investment, you invest in the plan via a financial company. There are pros and cons to each of these styles so which will work best for you depends on your situation and the exact nature of the plan.
Program fees
Any investment with high fees is going to drag down your return. Fees for 529 plans come in a few varieties.
You may have enrollment fees to start the plan, annual maintenance fees, sales loads (commissions) and/or back-end loads. Avoiding plans with high fees can make a significant difference in your investment performance. Some plans have annual fees as high as two percent or more. SavingForCollege.com has a fee study from November 2009 that adds up the fees for the direct sold 529 plans.
To get a more detailed comparison between 529 options you should research the plan and investment documentation and find all the fees charged. You can use the expense analyzer at FINRA to estimate the total expenses on a comparable investment between two 529s.
Tax Benefits and Matching funds
Tax benefits are one of the most important aspects of a 529 plan. Most state 529 plans offer some form of state tax deduction for the funds you invest in the 529.
A minority of states even have some sort of match funding. States with multiple plan options will generally have the same benefits for each plan.
If your state has no match, tax credit or deduction incentives, then it may make more sense to shop around and buy a generic plan or one from another state. You won’t get a tax benefit or match from out-of-state 529 plans but you may get better investment choices and lower fees.
Investment options
A plan can be simple with only a handful of options or complex with a variety of funds or indexes to purchase. If a 529 plan only has a handful of mutual funds from a single company, then that would be more limiting than a plan with a wider variety of choices. A good plan should offer a variety of investment options so you can invest in different asset types as well as different sources.
Investment returns
The returns on investments will depend largely on the type of investment chosen.
So comparing returns is difficult to do across the board. However some 529 plans have funds that have generally performed above market and other 529′s have investments that have not done as well. SavingForcollege.com has ranked the general investment performance of the 529 plans on 1 year, 3 year and 5 year periods.
The Process of Picking a Plan
Now that we know the key things to consider when comparing a 529 you can go ahead and compare your 529 options. Start with the 529 plans offered in your state. Your state may have a single plan or a few plans. In addition to comparing the plans available in your state you should look at the alternative of investing in an out of state plan.
Here are the basic steps to evaluate and pick a 529 plan:
- Find your state 529 plan options.
- Research the plan tax benefits, investment options, expenses and investment returns for each option.
- Compare your state plans and pick the ‘best’ option for your goals and desires..
- Compare going with your state’s best plan versus enrolling in a plan from out of state.
Additional resources
Below are a few additional resources with information on 529 plans to help you in your evaluation:
- Morningstar published their list of the best and worst plans
- Saving For College 529 page
- College Savings Plan Network which has list of all plans by state as well as filter to compare plans by feature and compare by state.
