In my last article, I recommended that you invest in a 529 College Savings Plan if you are saving for college or private school education.
Today we will talk about “How do you know which 529 Plan to choose?”
There are many choices. Almost every state has one or more 529 plans. I will try to cut to the chase and give you my recommendations for choosing a good 529 college savings plan.
I am a fan of the website: www.savingforcollege.com. There are many valuable free resources available here. You can pay for a “premium” level of access to this site but I have not seen the need for it.
Thirty states offer some form of a tax benefit for investing in 529 plans. Some require you to invest in your state of residence’s plan to get that benefit and others give you a benefit (like PA) if you invest in any 529 college savings plan.
This information can help you see what benefit you will receive and the criteria you need to meet in order to get that tax benefit and quickly narrow down the 529 plan you want to invest in.
Be aware though that what sounds like a significant tax benefit, over the long run may not be enough of a difference to warrant choosing the 529 plan with higher expense ratios to save a couple hundred dollars in state taxes
There is no state tax benefit for NJ residents. Pennsylvania will give you a state tax benefit for investing in ANY 529 plan. The tax benefit can vary significantly for different states so check yours out.
Morningstar® researchers have calculated that a 5% state tax benefit is enough to make the decision easy and go with your state’s plan IF that is required to get the 5% state tax benefit. Not all state tax benefits have this high a savings.
Some other questions that you should consider when choosing a 529 plan are:
What are the investment options within the plan?
Most plans have age-based options that change the risk and percentage of stocks or equities over time automatically as the beneficiary ages. This is for those of us who want to set it and forget it. Others have more or less choices if you wanted to choose specific investments and create your own portfolio and change it on your own.
What fees does the plan charge?
Is there an annual fee? Is there an account maintenance fee? Are any fees waived if it is your home state’s plan?
What are the expense ratios for the investment choices within the 529 plan? The expense ratio is the amount you pay to own the investment. Usually this is reported as a percentage. If an investment has a 0.5% expense ratio, you would be paying $0.50 for every $100 invested. The higher the expense ratio the less money there is to grow. The expense ratio can make a significant difference in the growth of your investment over the long term.
I would recommend that you look for expense ratios in 529 plans to be below 0.30%.
Is there a minimum investment amount?
How is the plan’s customer service?
Some plans you can buy directly and others must be bought through an investment advisor.
Savingsforcollege.com has a very nice comparison tool to look at different 529 plans.
I pay for Morningstar® Premium access and of their top rated 529 plans, here are the three I usually recommend:
1. Utah’s My529Plan.
This plan uses low cost Vanguard and Dimensional Fund Advisor strategies that I am a big fan of and a high level of investor choice. You can also create your own custom set-it yourself age based options. The age-based portfolios expense ratios are very competitive at 0.16% – 0.19%.
2. Virginia’s Invest529 Plan.
This plan offers some different asset classes that are not found in many other retail plans such as real estate funds.
3. Nevada’s The Vanguard 529 College-Savings Plan.
This plan is run by Vanguard and so it has the firm’s low fees and great brains behind it.
Once you have chosen your plan, decide or have your financial advisor decide how to invest your funds.
Make it easy on yourself. I am a fan of the age based portfolios.
If you have selected a direct fund you can open the account online. To open the account you need your Social Security number and the Social Security number of the beneficiary, the person for whom you are saving and hope will go to college.
The big recommendation here is don’t wait too long! Do it now. The earlier you open and invest in the 529 the better. Time flies – quickly. The longer your investment has to grow, the better.
Another recommendation I have is to set up automatic savings so a set dollar amount goes into the 529 plan every month, if possible. You don’t want to have to think about it.
AND let others know that contributing to the 529 is a great gift! Many of us have way too many toys and things that our children don’t need. Don’t be afraid to let others know that a gift to your child’s 529 plan is greatly appreciated and will make a difference.
Don’t over think this. I tried to make this article to the point so you can make a decision and take action quickly and easily. You can make changes so it is better to do something now instead of taking too much time trying to come up with the “perfect” or best 529 plan. Just do it.
Please let me know if you have any questions on choosing a 529 plan or the investments within the plan.
Wishing you only the best,
Tara
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