Best 529 College Savings Plans 2013
With the cost of college tuition increasing 3-4% every year and students graduating with more debt than ever, setting up a 529 plan can be an extremely useful way to save for your child. 529 plans are accounts offered by both individual states and private companies to help people save for college by offering either tax advantages or the ability to lock-in present day tuition credits. Essentially, they provide a more effective way of saving for college compared to putting money in your regular savings or brokerage account. If you have a specific question about 529 plans, skip to our FAQ section.
529 College Prepaid Plan vs. 529 College Savings Plan
There are two different types of 529 plans: the 529 College Prepaid Plan and the 529 College Savings Plan. The most common 529 plan is the College Savings Plan. A 529 College Savings Plan is a tax-advantaged account that allows a student to accumulate assets for use at any accredited college or vocational school in the U.S. and even at some foreign schools. The key benefit of the plan is that you do not pay taxes on the investment gains, and 35 states offer either tax deductions or tax credits as well. The money can be used for tuition, books, and other required fees.
529 Prepaid Plans allow savers to purchase tuition credits in their home state’s university system at today’s rates. The advantage of this type of plan is that students are protected against the inevitable future price increases. Over the past 30 years, the cost of attending college has increased by over 200%. The disadvantage of the plan is that it limits the student to attending a state school in their home state. Parents who choose a prepaid plan should be confident that their child will attend a state school. Prepaid plans are only offered by state-sponsored plans, and not by private companies like TD Ameritrade.
How Do I Choose The Right 529 Plan?
If your state offers a tax deduction or tax credit (in addition to the tax-free investment growth that all 529 plans have), it is best to go with your state-sponsored plan to save on your income taxes. While every state offers a 529 plan, only 35 states currently offer either a tax deduction or tax credit. We have listed the best plans for these states on our Best 529 College Savings Plans by State page.
If you do not live in one of these 35 states, it can still be worthwhile to open a 529 account to take advantage of the tax-free investment gains, but there is no reason to automatically choose your state-sponsored plan. Because you do not receive any tax deductions or credits for choosing your state-sponsored plan, you should instead choose a plan based on its investment options and fees. The top things you should consider are:
- Low account minimum (below $100)
- Large number of investment options
- Low expenses (less than 0.5%)
Best 529 College Savings Plan For Those Without State Tax Deductions or Tax Credits
Low cost plan with no minimum with many investment options across a variety of fund families
TD Ameritrade’s 529 plan makes it simple to maintain an investment portfolio tailored to the age of your child by offering funds that automatically rebalance and become more conservative as your child gets older. For more sophisticated investors, the TD Ameritrade plan offers 17 other investment options including domestic & international equity and bond funds, real estate funds, and money-market accounts. The funds are managed by well-regarded fund management companies including Vanguard, T. Rowe Price, PIMCO, American Century, and many others. In terms of cost, TD Ameritrade offers funds with expense ratios as low as 0.26%. TD Ameritrade is also consistently rated as one of the most customer friendly and easy-to-use platforms, and was recently rated the #1 “Brokerage for Novices by Barron’s”. It is important to note that the TD Ameritrade 529 plan does not offer the prepaid option.
Frequently Asked Questions
What if my child doesn’t use all the money?
Money can be transferred to a “qualified member” of the beneficiary’s family, including siblings, children, parents, spouse, cousins, aunts, uncles, and others. Any money withdrawn for non-educational purposes would incur a 10% federal tax penalty and be subject to normal income tax rates.
What if my child receives a scholarship and still wants to use the funds in the plan?
If your child receives a scholarship and you no longer need to use the full amount of your 529 savings, you may withdraw funds up to the amount of the scholarship without incurring the 10% federal penalty.
How much can I contribute? What are the limits?
Each person can contribute $14,000 per child per year. You can also put your first 5 years of contributions in at once, meaning that you can contribute $70,000 in the first year (but then cannot contribute again until year 6). If you are married, you can also contribute an additional $14,000 per year on behalf of your spouse. So a married couple could contribute up to $140,000 in the first year.
You can only contribute money to a 529 plan if the value of the account is below $360,000. Once the value of the account exceeds $360,000, you cannot make further contributions, but the existing assets can still grow through investment gains.
Which states offer tax-deductions or tax-credits?
Alabama, Arizona, Arkansas, Colorado, Connecticut, District of Columbia, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Michigan, Mississippi, Missouri, Montana, Nebraska, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Utah, Vermont, Virginia, West Virginia, Wisconsin.
Find the best plans for these states here.