“I’ve saved way too much money for my kid’s college education!” – said no one ever.
We all know the costs of a college education continue to soar and yet the need for a college degree is more crucial than ever. 529 plans let you save money specifically for higher education costs, with some tax advantages. Although the money you put in is not tax deductible, money in a 529 plan grows tax free. When you pull money out to pay for qualified educational expenses you will not be taxed on the amount your investment has grown. When it comes to choosing a 529 plan you will first choose the plan, and then within the plan you will select your investments (similar to your 401(k)). Here are 5 factors to consider when picking your 529 plan:
In-state tax breaks
30+ states offer a tax benefit for contributing to their state 529 plan. Look up your state’s plan to see what tax incentives are offered for in-state tax payments.
You can invest in any state’s 529 plan
You are not required to invest in the plan of the state you live in. If your state offers a tax break then you may want to consider the in-state plan – but evaluate the fees and investment options closely (see below) before automatically choosing your in-state plan.
The plan location doesn’t affect which college your child can attend
The location of the 529 plan doesn’t matter when your child chooses their college. You can be a California resident, invested in the Utah 529 plan and your child can go to college in Washington.
Purchase options for plan
Some plans are sold only by financial advisors, and some allow you to purchase directly. In general I recommend plans that you can purchase directly. You want your contributions to go toward your investments, rather than to financial advisor commissions. A fee-only financial advisor can help you pick the right 529 plan and investments in that plan for a straight fee. In this case the advisor doesn’t have an incentive (commissions) to encourage you to buy one plan over the other.
Pay attention to the fees
As with any investment it is important to understand the fees of 529 plans. My favorite tool for evaluating 529 plans can be found at Savingforcollege.com. The website will show you the fee the 529 plan charges, plus the fees for the investments themselves. Ideally you want to see low fees for both. I personally like the Utah Educational Savings Plan as they have low program management fees and they offer low-cost Vanguard funds as investment options. If you are overwhelmed by the investment options most plans offer an age-based investment. These portfolios automatically adjust based on your child’s age, so they become less risky as your child gets closer to going to college.
Once you have considered these 5 factors pick a plan that makes sense for your family and start saving. You will never regret saving for your child’s education!
Have a friend who is delaying picking a 529 plan? Send her these 5 factors to consider so she can start saving today as well.