How to Choose a 529 Plan for College Savings
Image courtesy of Fuuu
One of the most important decisions newly married couples will need to make is whether or not they will help fund their future children’s college education. If you decide that you do, in fact, want to help out, a 529 plan is probably your best option for saving up the money. A 529 plan allows you to save up for college expenses tax free, similar to a Roth IRA for retirement. However, the money will have to be used for college-related expenses or you will have to pay a penalty. You can, though, transfer the funds to a different beneficiary if you wish. Each state has its own 529 plan and you do not need to invest in your own state’s plan. It may seem a little overwhelming trying to determine which state’s plan is best for you. When it comes down to it, there are really three main things you need to consider when comparing 529 plans:
- Does Your Own State’s Plan Offer Tax Incentives? Many plans will offer tax credits or deductions to the residents of that state. If your own state’s plan offers such an incentive, you will most likely be best off by choosing your own state’s plan. However, not every state offers such incentives. If your state does not offer tax credits or deductions, you will most likely be better off by looking into other states’ plans.
- How Much in Fees Will You Have to Pay? Each 529 plan is different. Some of them have very low fees while others charge very high fees. Unless your state offers a tax incentive, you will most likely be better off by choosing a plan with very low fees. When looking at fees, make sure to consider enrollment fees, maintenance fees, management fees, and the expenses of the underlying investments. Some states with low-fee plans include Utah, Michigan, and Iowa. Make sure to compare the pros and cons of each state’s plans.
- What Types of Investments are Used? Different states use different kinds of investment vehicles. In fact, most states will offer a few options for your investments. Make sure you are comfortable with the investments your plan uses. Do you want a plan that uses Vanguard mutual funds? Do you want an age-based plan? Do you want to invest in mostly stocks or mostly bonds? These are some of the questions you will need to ask yourself when deciding between different investment vehicles.
Although there are other considerations you may wish to make when choosing a 529 plan, such as minimum payments and maximum contributions, the three just listed should help you to dramatically narrow down your list of options.
As for me, personally, I have narrowed down my options to the Utah plan and the Iowa plan. My own state (Kansas) does not offer tax incentives for contributing to its own plan, so I decided to look out-of-state. Both of these plans have very low fees, although the fees are set up a little differently. Both plans have options that use Vanguard mutual funds, which I am particularly fond of and trust. The Iowa plan is also partnered with UPromise, which I happen to really like and which makes it easy for other family members to contribute to the plan. In the end, I will probably look closer at the fees and determine which one would be cheaper in the long term.
If you would like to learn more about 529 plans, check out Savingforcollege.com. There, you can compare different states’ plans and learn more about 529 plans in general.
Do you have any experience with 529 plans? Which plan is your favorite? Let us know!
If you enjoyed this post, make sure you subscribe to my RSS feed!
If you enjoyed this post, please consider to leave a comment or subscribe to the feed and get future articles delivered to your feed reader.
