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.
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
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.
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
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!