What is the best 529 plan for me?

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  • 3 people found this answer helpful

    CFA, CFP® San Francisco, CA

    The best of all worlds in a 529 plan would be a plan that:

    1. Offers you extra incentive to contribute in the form of an immediate state tax credit or state tax deduction on money you put into the account if you are a resident of that state. 

    2. Allows you a few but not too many investment options, meaning you can put the contributions to work earning a return in one of several mutual fund choices. You would like to have available an “age-based” fund, which automatically and gradually changes your investment profile from aggressive (mostly stocks) to more conservative (mostly bonds and cash) as college costs approach. If you wish to have more control, pick a plan which offers you a money-market fund (cash) choice, a bond fund choice, and a stock fund choice so that you can opt for whatever mix you feel is best for your situation.

    3. Has low ongoing management fees in the investments available. Higher fees mean that more of your investment returns each year are trimmed away by costs before you receive them. Fees are used to pay the fund provider’s overhead, and some fund providers offer more competitive fees. Start by looking at States whose plans are operated by traditionally lower cost providers such as Vanguard. Also, opt for direct-sold plans rather than adviser-sold plans, as they reduce one extra middleman from the process. By saving money on fees year after year, you could wind up with thousands more dollars by the time college arrives.

    4. Uses a fund company you know and trust already. States hire out the administration and investment management to large financial firms such as Principal Financial, Fidelity, TIAA-CREF, Vanguard, and others. If you are comfortable and familiar with one provider through your experience with other personal accounts such as your 401k,  then choose a 529 plan managed by that provider.

    5. Offers a college savings plan in place of, or in addition to, a prepaid tuition plan. Prepaid tuition guarantees the beneficiary a tuition free college education at one of the state’s public colleges once a certain contribution has been met. If the student ends up elsewhere, there are limits on transferability in some cases. College savings plans give you more control and flexibility around where to utilize proceeds for college.


    Based on where you live, where your child might attend college, and where other family member contributors to live, you might determine that the best state 529 plan is not in the state where you currently reside. For example, a state like California doesn’t offer special incentives for residents opening up a 529 plan, nor does it penalize residents for setting up a plan outside of California. As a result California residents looking for lower investment fees might like Nevada’s Vanguard operated plan instead of California’s TIAA-CREF offering. This requires research on your part. A great place to begin is the website collegesavings.org. Its search tool allows you to filter all state plans for the features you need. Begin learning about your home state, then branch out from there. Once you have settled on a plan, be sure to read the plan disclosure booklet to learn details about tax deduction phase outs, annual limits on fund transfers, and all of the other “fine print” issues. 529 plans are a very powerful tool and they make it easy for friends and family to chip in with gifts. The earlier you start saving, the easier it will be later. Do not let the vast array of choices paralyze you from action. Do your basic research and get started opening an account. Later on you can move the account to a different locale if necessary to optimize based on your circumstances. Please take advantage of this great opportunity!




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  • 1 person found this answer helpful

    AIF®, CFP® Carlsbad, CA

    I agree with Stephen, expenses should be viewed as your worst enemy. 

    I'd further explain three factors in choosing a plan:

    1. No matter what type of savings plan, it is good to understand your investment options. A 529 plan should offer a variety of investment asset classes including both domestic & foreign choices as well as short and intermediate "high quality" bond fund options. Further, the plan should also offer a safe cash option preferably FDIC insured.  A safe cash option will make sense once you've accumulated the amount needed to pay for your child's education. Overall, the plan you select should ultimately reflect your own personal investment philosophy so you can best understand the risks and stick with the program through good and bad markets.
    2. The lower the costs, the less returns will be reduced by fees. An example of a low fee is 0.25 percent per year. 1.00 percent per year is high. 
    3. Both federal and state tax benefits should be considered. But choosing your own state’s plan should not be your immediate default. Research and compare the tax benefits of various plans and have your CPA, if needed, help you determine how much tax benefit you'd receive for staying within your own state's plan or going elsewhere.  You may be surprised that the income tax deduction isn't worth staying in state (that is assuming your state allows for a deduction). 


    Here are a few basic questions that can help you find a good plan:


    • Are the plan's expenses reasonable?
    • How are the plan's funds allocated?
    • What flexibility do you have in building a portfolio with the available funds or in selecting an age-based allocation?
    • If you do select your own state's plan, what happens if you were to move out of your current state?


    Good luck with your search.

    Jeff

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    CFP® Denver, CO

    With the cost of college continuing to soar, many parents worry a great deal about how to afford it.  A 529 plan is a great start for most parents and even grandparents.  Some things to consider are:

    ·  Start saving early.

    ·  Consult your tax accountant to see if your specific state offers a state tax deduction.

    ·  Compare the fees associated with different plans.  Since saving for college tends to be a long-term investment, fees can make a big difference over long time horizons. 

    ·  Choose a plan that offers a wide range of investment options. 


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    CFP® San Francisco, CA

    Lyman provides a good summary of what to look for in a 529 plan. Some additional thoughts:

    1.  If the beneficiary of the plan you set up elects not to attend college you can move those funds to another person in the same generation.   

    2.  You can move 529 funds from one state to another once per year.

    3.  There are international institutions which are qualified institutions for 529 tax benefits

    4.  Use the direct sold programs and a reliable name like Vanguard works well.

    5.  Sometimes 529 plans, because of their lack of flexibility, are not the best way to save for future educational expenses.  I often use zero coupon or coupon bearing CA municipal bonds where the interest is double tax free and the parents control the funds and as well the future use of the funds.  Stuff happens so flexibility is important to consider.

    6.  Another good alternative offering many of the same advantage of municipal bonds are Roth IRA accounts and contributions assuming you are eligible to contribute.  Any principal contribution that are non-conversion Roth's can be used anytime for any purpose.  This is not true for Roth conversion funds.

    7.  An excellent website I recommend is www.finaid.org to answer all questions in regard to funding educational expenses.

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    CFA Oakland, NJ

    I would suggest the one with the lowest cost. Consider using ones that have index funds since these accounts typically have a limited choice of funds so if an active manager does not perform well you may not have many choices to replace them with from within the limited stable of choices. Expenses therefore become the most important element in the decision process. You may also want to see if the 529 plan within the state you reside has some special advantages for you. For example in NY you can get a state income tax dedcution for your contributions to NY's plan. That is a significant benefit.

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    San Francisco, CA

    If your state offers a tax benefit, is usually best to find a plan from your state. Not all states require you to use their plan. You can easily find specific state tax benefits here:

    http://www.finaid.org/savings/state529deductions.phtml

    If your state does not offer a tax benefit, look for low cost funds and good fund choices. Vanguard is a good option here. 


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User Answers

  • Randal says:

    I think most people end up opting for the 529 plan for their state although I know its possible to have a plan from a state that you're not a resident in. The big benefit of 529s is that some of them give state tax benefits, but you won't be able to take advantage of that if you're not living in the state in question.

  • Sarah says:

    Our son just graduated from the University of Illinois Urbana-Champaign, and we funded his education through the Univeristy+ program. I don't know how programs in other states work, but having the full amount of tuition and fees pre-paid worked well for us and saved us a boatload.

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