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By Anne Dennon, Staff Writer

The Best 529 Plans

A state-sponsored 529 savings plan is an investment portfolio ear-marked for college expenses. Money grows tax-free in a 529 plan and comes out tax-free, too — so long as it is put toward qualifying educational expenses. Every state has at least one 529 plan, and many have two or more. We spent four weeks researching 529 plans, landing on the best by grading them on four core metrics: past performance, management expenses, investing options, and data accessibility.

The 3 Best 529 Plans

New York’s 529 College Savings Program

Best
Overall Plan

New York's 529 College Saving Program
Plans available: 17
Minimum contribution: $0
Total maximum contribution: $520,000
Pros
Standardized, rock-bottom fees
Plethora of investment options
High maximum investment
Cons
State income tax deduction
Rollovers subject to tax

Why we chose it

Standardized, rock-bottom fees

The same fee across plan types means you aren’t cornered into enrolling for a plan based on expenses alone. With New York’s 529 College Savings Program, you can expect an exceptionally low 0.13% expense ratio (ER) no matter the portfolio you invest in — high-risk, low-risk, static, age-based. Even for the most minimally-managed, low-risk portfolios, a 0.13% ER would be remarkable. For stock-heavy plans, it’s astounding. Making investments with expenses top of mind is a smart money move: Investing with New York’s 529 minimizes expenses so you can maximize returns.

Plethora of investment options

Whether you’re a conservative investor on the hunt for a water-tight, bond-focused portfolio, a risk-tolerant investor looking for big gains, or a hands-off investor interested in an automatically adjusting, age-based system, you’ll have options under New York’s 529 plan. What’s more, all plans turned up encouraging numbers in their five-year data. Conservative plans have gains in the 1-5% range, with more active portfolios gaining as much as 6.7%.

High maximum investment

New York’s 529 College Savings Plan shows small numbers and big numbers exactly where you want to see them. The no-minimum investment means that you can pump up the total with any amount at any time, and the sky-scraping $520,000 maximum investment means that you have a high ceiling to accumulate future education funds.

Points to consider

State income tax deduction

New Yorkers can deduct up to $5,000 per beneficiary per year, or $10,000 if married and filing jointly, from their taxable income to invest in a 529 plan. (If you’re investing as a gift, you can contribute $15,000 or $30,000 jointly.) A serious boon for those who both live in the empire state and choose to save for higher education there. But investors from other states can’t reap this reward and should weigh potential tax savings in their home state against the returns and low expense of New York’s plan.

Rollovers subject to tax

If you choose to move your account from New York’s 529 plan to a 529 plan in another state, the money will be subject to New York’s tax on earnings. It’s doubtful that you will need to transfer a 529 account in this way, since there are so many options internally if you want a different portfolio. Still, it’s good to be aware that your money could get a hefty bite taken out of it if you want to roll it over to a totally new account.

Ohio’s 529 CollegeAdvantage

Best
Conservative Plan

Ohio's 529 CollegeAdvantage
Plans available: 20
Minimum contribution: $25
Total maximum contribution: $462,000
Pros
Portfolios for every investor
Low expense ratios
High-performing conservative investments
Cons
State income tax deduction

Why we chose it

Portfolios for every investor

Some people want to take an active role in managing their 529 investment. Others want to make a decision once — to open a certain account — and then let the money ride. Ohio’s 529 CollegeAdvantage has a breadth of offerings wide enough to accommodate both investment styles. Choose from ready-made plans that allocate based on the age of your benefactor, their college-entrance year, or your risk tolerance. You can also design your own plan with a range of equity options — stocks, bonds, and cash instruments.

Low expense ratios

Expense ratios measure how much of a fund’s assets are used for operating expenses. ERs between 0.5-1.0% are common; anything below is golden. For both static and age-based portfolios, expense ratios (ERs) for Ohio’s 529 CollegeAdvantage stay below 0.22%. Static ERs range from 0.19-0.22%; age-based from 0.20-0.22%.

High-performing conservative investments

Ohio’s 529 has performed well across the board, with returns breaking 5% on a number of higher-risks portfolios. But historically the portfolios that have performed exceptionally well are the bond-heavy options. Seeing close to 1% isn’t uncommon for these low-risk accounts, but five-year data for plans made up of 50-100% bonds shows returns of 2-4%.

Points to consider

State income tax deduction

If you are an Ohioan, you can deduct up to $4,000 per beneficiary from your income tax. Not an enormous sum compared to the in-state tax benefits of New York and Pennsylvania, but still a pretty penny to be able to invest, watch grow, and withdraw tax-free. But for residents of all other states, this income tax perk won’t be available.

Pennsylvania 529 College and Career Savings Program

Best
Guaranteed Savings Plan

Pennsylvania 529 College and Career Saving Program
Plans available: 16
Minimum contribution: $25
Total maximum contribution: $511,758.00
Pros
Secure savings option
Healthy performance
Low management expenses
Cons
State income tax deduction

Why we chose it

Secure savings option

Pennsylvania 529 sponsors two plans: an investment plan (IP) and a guaranteed savings plan (GSP). If you are turned off by market fluctuations, opt for the security of the GSP. The Pennsylvania Treasury invests for you, and the fund takes responsibility for performance. The end-result: No matter how your money has fared, the credits and semesters you “bought” with your contributions will stand. This is because your investment dollars are organized as evergreen credits at five different tuition levels (community college, university, etc.).

Healthy performance

Pennsylvania 529 offers 16 investment plans that span the full gamut of age-based, blended, and 100% stock and bond options. All of the above have enjoyed solid performance over the past five years. Aggressive portfolios have seen returns in the 5% range, while more conservative portfolios have seen 2-5%.

Low management expenses

All of Pennsylvania’s 529 plans levy dependably low management fees — every plan we compared comes with a moderate 0.24-0.25% expense ratio (ER). Rule of thumb when it comes to ERs: The more aggressive the holdings, the more actively they are managed, the higher the fees. An ER between 0.5% and 1% is typical for actively managed funds, while 0.2% is average for passive management. With Pennsylvania 529, you are paying the lowest end of fees no matter the investment portfolio. Plus, there’s no annual fee (normally $10) if you opt out of paper delivery.

Points to consider

State income tax deduction

While income tax deductions are available, they’re exclusively for Pennsylvanians. If you’re out-of-state you miss out. But locals can deduct up to $15,000 per beneficiary per year (or $30,000 if married and filing jointly) from your taxable income if you’re investing that amount in your 529 plan. That’s higher than most. And thanks to Pennsylvania 529’s high upper limit ($511,758), you could make that max yearly investment for longer than you are likely to hold the plan.

Guide to 529 Plans

What to do before and after you pick your 529 plan

Learn the Oxygen Mask Rule

While saving for your children’s college is definitely important, many parents mistakenly identify it as the most important long-term financial goal. But recall the safety briefings of flight attendants: always secure your own oxygen mask before you assist anyone else. The idea is that if you don’t take of yourself, you won’t be able to help your children either. The application to finances is pretty self-explanatory: It’s no good over-contributing to a 529 plan if you’ll have to make taxed and penalized withdrawals in an emergency.

Keep in mind that you don’t necessarily have to pay for 100% of your student’s education. Determine what your target percentage is, and don’t overextend yourself. While students can borrow to pay for college, you can’t borrow to pay for retirement. Paying off debt, building an emergency fund, saving for later in life — these are all financial considerations to prioritize before enrolling in a 529 plan.

Start saving early

It quite literally pays to start early – saving a smaller amount earlier can be more effective than saving a larger amount later. The table below illustrates the benefit of starting to save as early as possible. Compare the first and third investment scenarios. The individual who contributed $100 per month over 15 years put in nearly $2,000 more than the individual putting in $75 per month over 18 years, yet wound up with $600 less.

Choose your portfolio

Once you’ve enrolled, you choose how you want your money invested. The two key considerations are your risk tolerance and the age of your child, and these concerns are intertwined. The idea is that when your student is young, market fluctuations aren’t a problem – maximum growth is the goal at that point. When your student gets close to college, you want to maintain the funds you have so that a sudden market downturn doesn’t derail college plans.

Ten or more years away from college? With that time horizon, you may be willing to ride market fluctuations for a chance at greater growth. Look to high-risk, stock-heavy plans. If your student is just a few years away from college, however, you may just look at 529 plans as a tax-advantaged way to save money. Turn to low-risk options made up primarily of bonds. Most plans also have age-based options in which your investment automatically shifts from higher to lower risk as your student gets closer to college.

Start investing

You can contribute to your plan in multiple ways. Available options include automatic payroll deductions (if your employer allows it) and recurring drafts from your bank account. You can also make single payments online, usually monthly or quarterly.

Withdraw and track

When it comes time to withdraw 529 funds, know that the total amount withdrawn each year cannot exceed your child's adjusted qualified higher education expenses, minus other tax benefits. The earnings portion of money withdrawn for non-qualified expenses are subject to federal income taxes, as well as a 10% penalty. If you withdraw more than you can appropriately spent, funds can be re-contributed within 60 days.

Make sure you know what’s considered a “qualified education expense” and what isn’t. Perhaps the most important action is to separate qualified payment receipts (textbooks) from other purchases (video games). If you are making purchases that fall in the gray area between curricular and extra curricular, check with the college’s department of financial aid. Room and board, for example, is covered, but only for as much as the college estimates room and board should cost. To avoid penalties, ask before you spend.

529 Plans FAQ

What is a 529 plan?

According to the U.S. Securities and Exchange Commission, a 529 plan is a “tax-advantaged savings plan designed to encourage saving for future college costs.” While the funds you contribute to the plan are not deductible on your federal income tax return, the funds do grow tax-free and aren’t taxed when used for “qualified education expenses.“

What’s the difference: savings plan vs. prepaid plan?

There are two basic types of 529 plans: “savings” and “prepaid.” Savings plans invest the money you deposit, while prepaid plans are basically an insurance policy. In pre-paid plans, you select a college in the same state as the plan and pay tuition ahead of time to avoid paying more for college when your student is ready to attend. We only considered savings plans in this guide so that our recommendations are useable by everyone for colleges in any state.

What’s the difference: direct-sold plan vs. advisor-sold plan?

There are two ways to purchase 529 plans – you can invest directly into the plan offered by the state (you control how that plan invests your money), or you can purchase a plan through an advisor who then handles the investing for you. We haven’t considering advisor-sold plans as they tend to be more expensive (and their expert help usually doesn’t make up for the extra cost of their fees).

Do you have to invest in a 529 plan offered by your state?

For all of the plans that we ranked, no. It doesn’t matter where you live or where your student’s eventual college is located. For instance, you can live in Nevada, invest in New York’s 529 Plan, and your student can go to college in Georgia.

Note: Some states have lower expenses and/or state income tax deductions available for residents that invest in their state’s 529 plan. However, those considerations have to be weighed alongside the plan’s past performance and expenses.

How much money can you put into a 529 plan?

You can save up to $15,000 per parent in a 529 account, or $30,000 per couple. Grandparents can also contribute up to $15,000 per person per year. Contributing more than $15,000 per person would need to be reported to the IRS as a gift. However, a 529 account can be “superfunded” with contributions of $75,000 per person or $150,000 per couple — which uses up your federal gift-tax exclusion for 5 years.

When is it worth it to go with an in-state 529 plan?

The primary benefit to investing in-state is the option to deduct the amount you invested in the state’s 529 plan from your taxable income on your state’s tax return. This benefit varies in worth based on how high your state’s income taxes are. Of course, there are some states that don’t offer this benefit, or don’t have state income tax at all. Other states offer this benefit to residents that invest in a 529 plan from any state.

Some 529 plans also offer lower expenses to in-state investors. For instance, waiving the annual account fee is a common benefit offered to residents. This is more of a side-benefit, and not something we spent a lot of time considering as a $20 per year fee isn’t going to make a whole lot of difference overall when compared to the plan’s past performance and overall management expenses.

Can a 529 plan fund primary education?

As of 2018, 529 plans can also be used to fund primary education — elementary, middle, or high school; private, public, or religious. But unlike college funding, 529 payouts for primary education have an upper limit. No more than $10,000 per year may be spent on K-12 education. An inhibition for big-ticket primary and secondary schools, but also a sage reminder to conserve funds for the presumably greater expense of college.

Can the money be spent on post-secondary education other than college?

Funds from a 529 plan can be used to pay for qualified education expenses associated with any post-secondary education, not just college. Eligible schools include any college or university, but also vocational schools. The deciding factor is whether the institution is eligible to participate in a student aid program administered by the U.S. Department of Education.

What if your child doesn’t attend college, or gets a full-ride?

Luckily, 529 plans offer two fail-safes to deal with these eventualities. You can withdraw the amount of any scholarships your student receives without penalty (though you will pay tax on those earnings). And if you have funds remaining after paying for your student’s school, or if your child decides to skip college, you can use the plan to fund another child’s or relative’s education.

The Best 529 Plans: Summed Up

New York’s 529 College Savings Program
Ohio’s 529 CollegeAdvantage
Pennsylvania 529 College and Career Savings Program
Best Overall Plan
Best Conservative Plan
Best Guaranteed Savings Plan
Average high-risk returns (100% stocks)
6.7%
5.72%
5.35%
Total investment options
17
20
16
Static and age-based plans

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