Choosing a 529 college savings plan that is right for you requires a little effort and studying on your part. Essentially, there are four major areas to focus on when trying to choose a plan:
- In-State Resident Benefits
- Investments
- Fees and Expenses
- Plan Features
IN-STATE RESIDENT BENEFITS
In addition to the federal tax benefits, which are available across all 529 plans, some states may offer their residents additional incentives for selecting the home state plan.
When you look at state-specific benefits, start by asking a few key questions:
- Does my home state’s 529 plan offer me any tax breaks? In most states, your 529 earnings grow tax-free and can be withdrawn state income tax-free, if used for college. Additionally, some states offer a state income tax deduction or credit for investing in the home state plan. The value of the deduction may vary state to state and is applicable to both the direct-sold and the advisor-sold plans sponsored by any given state.
- Does my home state offer any matching programs or scholarships? Certain states also provide matching programs or scholarships to their residents, if they invest in the home state plan. However most often these incentives are limited or eliminated for residents at income levels.
Not only should you review the tax benefits or incentives your state may offer, also be sure to look into limitations (such as recapture of deductions) that may apply in certain circumstances.
Compare these tax benefits against other features and advantages of the plan, such as quality of investment options and plan fees, in order to make an informed decision.
INVESTMENTS
In evaluating different 529 college savings plans, the investment lineup offered in the plan should be considered for two important things:
- Investment Options. While most plans offer a set of portfolios to choose from, some plans offer a wider range of investments than others (including individual mutual funds or CDs). When evaluating the investment lineup, look for investment objectives and strategies that work best for your needs and goals. If you are uncomfortable with picking and managing investments, you may want to work with a financial advisor or choose a plan that offers Age-based portfolios, where your savings are automatically invested based on the age of your child.
- Investment Performance. The investment performance of portfolios in a 529 college savings plans can vary widely. All portfolios offered in a plan have a documented performance history that show how they have done over a period of time. In addition, you can look to see how the underlying investments (mostly mutual funds and similar investments) of a particular portfolio have performed over the years. Always remember, historic performance does not mean the investments will perform the same way in the future.
- Investment Manager. While performance is important, most plans’ investments have short track records that may not indicate how they will perform in the future. So it is important to consider the credibility of the investment manager. Look for an investment manager that has a history of consistency and responsibility toward its shareholders.
Visit the plans’ websites directly to learn about the available investment portfolios, which underlying funds are in them and how the portfolios have performed over time. You can also find performance and fee information on sites such as Morningstar.
FEES AND EXPENSES
Like all investments, 529 college savings plans also charge their investors various fees and expenses. These charges can vary between plans and can have an impact on the ultimate value of your account. Here is some basic information of the types of fees and expenses that each plan may charge.
Account Fees – These fees are directly deducted from your contributions into your 529 account.
- Enrollment or Maintenance Fees. Some plans charge a one-time enrollment fee or annual maintenance fees. These fees may be waived or reduced if you maintain a large account balance, participate in an automatic contribution plan or if you are a resident of the state sponsoring the 529 plan.
Asset Management Fees – These fees are calculated as a percentage of your assets in the plan.
- Program Management Fee. Charged by the program manager for administering the plan, this fee covers such things as plan administration, management, servicing and recordkeeping.
- State Administrative Fee. Charged by the state agency that manages the plan, this fee covers the administrative costs incurred by the state.
- Underlying Investment Expenses. This fee depends on the investment option you select, and is charged by the investment manager for managing the portfolio. The expense is calculated as a percentage of the portfolio’s assets.
Fees specific to Advisor-sold plans
- Sales Charge or Commissions. 529 college saving plans sold through advisors are likely to have an additional sales charge. Depending on how you invest, this fee is applied at the time of investing (front-end load) or depending on the share class purchased and length of time held, at withdrawal (back-end load or a contingent deferred sales charge).
Be sure to review each plan’s fees structure carefully before proceeding. This information can be found in the program disclosure document that is found on the plan’s website. You can also analyze fees and expenses at: http://apps.finra.org/Investor_Information/Smart/529/Calc/529_Analyzer.asp
PLAN FEATURES
One final way you can help distinguish between 529 college savings plans is by evaluating the various features that each plan offers. Such features may include the minimum and maximum limits, rewards programs, website support, transactional restrictions and overall plan service.
The best way to learn about the various features of a specific 529 college savings plan is, in most cases, to go directly to the plan website where features are usually outlined in detail.
For a summary of features you can also visit our 529 College Savings Plan Comparison tool.
While all 529 college savings plans can help you save for college, they all have different features, performance and fees, and each state may have different tax benefits.
You may find that your state’s plan has great tax advantages, but poor investment performance. Or you may discover that another state’s plan has great investment performance, but higher fees and fewer tax advantages than your home state. Or you may learn that you want to work with a financial advisor to help you choose the best plan for you. Whatever path you take, be diligent in evaluating plan specifics and make use of the various tools available to find the plan that is best for you.
Investments in 529 college savings plans are neither FDIC insured nor guaranteed and may lose value. Please note the plan's disclosure document includes details such as investment objectives, risks, charges and expenses, and other information that you should read and consider carefully before investing. You can obtain a copy of the plan document from each 529 plan sponsor.