Picking the Best 529 College Savings Plans

This is the second of three posts on 529 plans.  Read the introduction here and the prepaid tuition post here.


20% of households with 529 savings plans invest through plans outside their home state.  Why would they go out-of state?  And should you consider going further afield?  Read on to find out.

529 savings plans are established by individual states. They are all similar, but some plans cost less in fees and show higher returns. And you should by now that those two features will make all difference. For example, NerdWallet.com’s 529 plan finder shows $5,000 invested in Oregon’s plan would have grown to $7,714 between 2010 and 2015. But the same amount placed in Michigan’s plan would have grown to $10,017.

There are three things to consider when picking a 529 savings plan:

  1. In-state tax deductions (see below)
  2. The difference in fees (from 0.05% in MA to 1.09% in AK)
  3. The expected performance

STATES WITH TAX BENEFITS FOR IN-STATE PLANS:
Most states offer tax deductions or credits for investing in their own 529 plan. Eighteen states do not offer a tax deduction. And five states will give you a tax deduction for investing in any state’s 529 plan.

States: Alabama, Arkansas, Colorado, Connecticut, Georgia, Idaho, Illinois, Indiana, Iowa, Louisiana, Maryland, Michigan, Mississippi, Nebraska, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Utah, Vermont, Virginia, West Virginia and Wisconsin, plus the District.

Strategy: Assess the value of your state’s tax deduction or credit using this map by SavingForCollege.com:

529-state-tax
Photo by SavingForCollege.com

Read through the details of your state plan.  If there is a cap on contributions, consider maximizing that deductible, but also, investing in another state’s 529 plan with low fees and high returns. This strategy allows you to save more while diversifying.

STATES WITHOUT TAX BENEFITS FOR IN-STATE PLANS:
States: Alaska, California, Delaware, Florida, Hawaii, Kentucky, Maine, Nevada, New Hampshire, New Jersey, North Carolina, South Dakota, Tennessee, Texas, Washington and Wyoming.

Strategy: Because there is no monetary incentive for staying in-state, you are free to choose a 529 savings plan with a good balance of low fees and high returns.

STATES WITH TAX BENEFITS FOR INVESTING IN ANY 529:
States: Arizona, Kansas, Missouri, Montana and Pennsylvania.

Strategy: Because you’re going to get a tax deduction regardless of where you invest, choose a state 529 savings plan with a good balance of low fees and high profits.


Your next step should be heading to CollegeSavings.org to research details on individual plans. Their tool allows you to choose plans to compare side by side.  It reveals many details including how to buy them, their fees, and even whether the state matches 529 contributions. This site also lists minimum contributions and their lifetime caps.

Don’t lose sleep from all these choices  The most important thing you can do is start saving today and consistently saving until you kids are ready for college.  When it comes to saving… you can’t go wrong, you can only go better.  And if all else fails, you can probably roll-over your current plan(s) to another state if you find a better deal.

This is the second of three posts on 529 plans.  Read the introduction here and the prepaid tuition post here.

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