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Which 529 Plan Is The Best?

choosing a 529 plan

I think I can speak for most parents when I say that we want our children to have a better life with less struggle than we had as children and young adults. By no means have I had a rough life, but there are some things that weren’t available to me or that my parents didn’t know how to provide that I would love to give to my daughter. One of those gifts is financial help with a college education. I think the best way to save for higher education is with a 529 college savings account, but which 529 plan is the best?

What Are 529 Plans?

529 plans are similar to Health Savings Accounts except the money is used for college expenses instead of health care. You don’t get any immediate federal tax breaks, but money contributed to eligible plans earns interest and can be withdrawn, tax free, if it’s used for tuition, fees, books, room and board, or other qualified education expenses.

There are two basic types of 529 plans. Self directed plans allow you to use contributions toward any accredited college or eligible education institution. Prepaid tuition plans allow parents to pay today’s dollars for future tuition credits at in-state or select private school.

In Colorado, we no longer have prepaid tuition plans, and it seems those are becoming less available as states shut down plans or close them to new enrollment. Besides, I don’t want to decide where my daughter goes to school. Hopefully, we will have some input, but that decision is one we can’t make for her.

The Best Plan Depends On Where You Live

The best 529 plan for your child depends on where you live. You can contribute to any state’s plan, but your home state might offer tax savings. In 33 states plus the District of Columbia, contributions to an approved 529 plan qualify for a state tax deduction. Check your state to see if its plans are eligible and how much the maximum tax credit might be.

If you don’t have state income tax or if your state doesn’t allow deductions for a 529, then you can choose a plan from any state, preferably one that has low fees and good investment options. Savingforcollege.com has tons of information about all eligible state 529 plans.

Watch For Fees

You’d hate to choose a plan and notice that a huge chunk of the contributions are going toward paying advisors or administrative costs. I like direct sold plans because they cut out the middle man and allow you to choose which funds you’d like to invest with. There are other plans that are run by financial advisors, but fees can be much higher. Ideally, you should look for a plan that takes less than a half percent in fees.

Investment Options

When deciding on a plan, it’s important to see what type of funds are available. While you can choose something as safe as a money market, you won’t get the growth from compound interest that comes from stock investments. If your child is young and has more than five years left before college, there really is no reason not to have a sizable portion of their 529 plan in stocks. The plan we have in Colorado uses Vanguard funds, which are low cost and easy to research.

If you don’t want to worry about rebalancing as your child gets older, choose a target date fund that coincides with the year your child will graduate from high school. It starts out heavily in stocks when your child is small and shifts to more conservative investments as he gets closer to college age.

Currently, we have an 80% stock, 20% bond mix for our daughter’s plan. It was 100 percent stocks until about a year ago. I’m OK with the ups and downs because she still has 10 years before college.

When In Doubt, Choose Utah?

Many investment sites will tell you to choose Utah’s plan if your state does not offer tax breaks or plans with low fees/good investment options. Utah offers multiple fund choices through Vanguard, and the fees are less than .25% annually. Some other good state options include New York, Wisconsin, Nevada, and Illinois.

Is a 529 Plan Better Than a Roth For College Savings?

Roth IRA’s have a provision that allows parents to withdraw contributions, tax and penalty free, for college expenses if they have owned the Roth for at least five years. Any amount of withdrawal greater than the contributions before age 59.5 is subject to taxes and penalty.

Roth’s have the benefit of flexibility. If your child doesn’t seek higher education, the money can be used for retirement. With 529 plans, if money is withdrawn for non-educational reasons, there is a 10% penalty plus income tax. A Roth might be a better idea if you think there is a good chance your kid won’t go to college.

A couple of downsides are that Roth’s are capped each year as far as contributions and only the account owner can contribute. For 2015, the Roth contribution is $5500 if you are under age 50, and the ability to contribute phases out at higher income levels.

With 529 plans, grandparents, aunts, uncles, or strangers on the street can contribute up to some pretty high limits. In Colorado, we can put in as much as we want until the account reaches $350,000. We would be nuts to have that amount in a 529, but it’s nice to know we can sock away as much as we feel comfortable with.

Don’t Choose College Savings Over Retirement

As much as we want to help our kid with college, we won’t sacrifice retirement to do so. If she has to take out loans, so be it. Both her Mom and Dad took out loans, and we turned out OK. I think any child  would be much happier not supporting her parents because they blew all their money or went into debt to give her a degree. Don’t save for your kids until you are comfortable with what you are saving for your own retirement years.

Do you have a 529 plan for your kids? If so, how did you choose it? Do you think parents should help with college?

 

About Kim Parr

Kim Parr is a private practice optometrist, freelance writer, and personal financial blogger. You can follow her journey to 20/20 financial vision at Eyes on the Dollar.

18 comments

  1. We’ve had 529 plans ever since our kids were born. Unfortunately we didn’t really shop around. We just compared the prepaid plan to our state’s (MI) 529 plan and made the decision to go with the 529. We do get a break on state taxes every year for contributing!

  2. We opened 529s several years ago for all of our kids. We didn’t shop around a whole lot because Nebraska had upped the amount you could put away and still get tax benefits from and they offer mainly Vanguard funds so I was pretty happy with it. It has kept us from having to owe the state anything the past few years so I’ll happily take the added benefit. 🙂

  3. We don’t have 529s for the kids yet as we are working so hard to get out of debt, but we are teaching our kids entrepreneurial skills so that they can learn to make their own money at a young age, just in case. Great article, Kim!

  4. Good explanation of 529s. We choose to invest in UTMAs for our children. Our retirement is covered, and the UTMAs allow us to pass on a nest egg to get them started. We like that they can use it for something other than school (if they choose an apprenticeship instead, or cash flow/scholarship their higher ed). There’s still a tax benefit, although it’s smaller than the 529 benefit. I agree that retirement needs to be taken care of first. Most kids can get through college on their own if they work simultaneously and choose an inexpensive school.

    • Thanks for sharing another option. I’m not as familiar with UTMA’s, but it sounds like a good option for your situation.

  5. I also use a 529 plan to save for Lauren and Taylor’s college education. While I know some people cringe at the potential penalties/taxes ramifications of not using the money on their children’s higher education, you can also change the beneficiary if your child opts to not go to college or doesn’t use the full amount. So if Lauren or Taylor don’t use the amount, I will probably put myself and/or Chris as the beneficiary because both of us have always been interested in getting a PhD or I could change it to a nephew, niece, godchild, family friend, etc. too.

    • That’s an excellent point. I’m not sure I’m up for another degree, but Jim has talked about a PhD, and we have five nieces and nephews. Surely one of them will go to college!

  6. We use our state plan (Indiana). Our state also offers a 20% tax credit on the first 5K we contribute each year. That’s 1K in instant return at tax time each year. It’s a huge incentive for us.

  7. I read about this recently and I heard it may be advantageous to open one in your “home” state as they sometimes give residents better tax advantages. I think you (or someone else) should write a monster post on all the available plans and show mathematically which are the best. I say you because there is no way I’m going to do it haha

  8. I am not yet a parent. But, I’d definitely have a 529 plan for my kids. It’s better to be ready than not. And, having it makes me feel more secured that I am doing something for my kids’ future.

    • It is a good feeling to have somewhat of a head start for college. I doubt we’ll be able to save enough to pay for everything, but whatever help we can give will be better than nothing.

  9. We don’t have 529s. We will help our kids with tuition, but our focus right now is paying off my student loans.

  10. I have the 529 plan from New York since I live there and get a tax deduction. Plus, they have plans from Vanguard which I am a fan of because of their low fees. I definitely think that parents should prioritize their roth retirement contributions but it’s nice to help out your kids with college as well.

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