Best 529 College Savings Plans

Planning for your child’s future education is a significant undertaking. With rising tuition costs, starting early and making informed decisions is crucial. One of the most popular and effective tools for saving for college is a 529 plan. But with so many options available, choosing the right plan can feel overwhelming. This guide provides a comprehensive overview of the best 529 college savings plans, helping you navigate the complexities and select the plan that best suits your family’s needs and financial goals.

What is a 529 Plan?

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education expenses. These plans are named after Section 529 of the Internal Revenue Code. There are two main types of 529 plans: College Savings Plans and Prepaid Tuition Plans.

College Savings Plans

College Savings Plans are investment accounts where you contribute money that grows tax-deferred. The earnings are not taxed as long as the funds are used for qualified education expenses. These plans typically offer a range of investment options, similar to those found in a 401(k) or IRA, allowing you to choose a portfolio that aligns with your risk tolerance and time horizon.

Prepaid Tuition Plans

Prepaid Tuition Plans allow you to purchase tuition credits at today’s prices for future use at eligible colleges and universities. These plans are typically offered by state governments and may have residency requirements. They are designed to protect against future tuition increases, but their flexibility is limited as they are often tied to specific institutions or state school systems.

Why Choose a 529 Plan?

There are several compelling reasons to consider a 529 plan for your college savings:

• Tax Advantages: Contributions may be tax-deductible at the state level (depending on the state), and earnings grow tax-deferred. Qualified withdrawals are tax-free at the federal level and often at the state level as well.
• Flexibility: Funds can be used at any accredited college, university, vocational school, or other post-secondary educational institution in the United States and even some abroad.
• High Contribution Limits: Many 529 plans have high contribution limits, allowing you to save a substantial amount for education expenses.
• Anyone Can Contribute: Grandparents, aunts, uncles, and friends can contribute to a child’s 529 plan, making it a popular gift option.
• Beneficiary Changes: If the original beneficiary decides not to attend college, the funds can be transferred to another eligible family member.
• Estate Planning Benefits: 529 plans can be used as an estate planning tool, allowing you to remove assets from your estate while still benefiting future generations.

Key Factors to Consider When Choosing a 529 Plan

Selecting the right 529 plan requires careful consideration of several factors:

Investment Options

The investment options available within a 529 plan are crucial. Look for plans that offer a diversified range of options, including age-based portfolios, target-date funds, and static allocation portfolios. Age-based portfolios automatically adjust the asset allocation over time, becoming more conservative as the beneficiary approaches college age. Target-date funds work similarly, with a specific target year for college enrollment. Static allocation portfolios allow you to choose and manage your own asset allocation.

Fees and Expenses

Fees and expenses can significantly impact the long-term growth of your 529 plan. Pay close attention to expense ratios, which represent the annual cost of managing the investment. Also, be aware of any account maintenance fees, enrollment fees, or other charges. Lower fees generally result in higher returns over time.

State Tax Benefits

Some states offer state income tax deductions or credits for contributions to a 529 plan. These benefits can vary significantly from state to state. If your state offers a tax deduction, consider choosing a plan sponsored by your state, even if other plans have slightly lower fees. The tax benefits may outweigh the difference in fees.

Plan Flexibility

Consider the flexibility of the plan in terms of contribution options, withdrawal rules, and beneficiary changes. Can you easily make contributions online? Are there any restrictions on withdrawals? How easy is it to change the beneficiary if needed? A flexible plan will provide you with more options and control over your savings.

Plan Performance

While past performance is not indicative of future results, it’s still important to review the historical performance of the investment options within a 529 plan. Look for plans with a consistent track record of strong performance compared to their peers. However, remember to focus on long-term performance and consider the risk-adjusted returns.

Ease of Use and Customer Service

The ease of use of the plan’s website or mobile app can significantly impact your experience. Look for a plan with a user-friendly interface that allows you to easily manage your account, make contributions, and track your progress. Also, consider the quality of the customer service provided by the plan. Is it easy to get in touch with a representative if you have questions or need assistance?

Top 529 College Savings Plans

Based on the factors discussed above, here’s a look at some of the best 529 college savings plans available:

1. Vanguard 529 Plan

The Vanguard 529 Plan is consistently ranked among the best due to its low fees, diversified investment options, and strong performance. The plan offers a range of age-based portfolios and static allocation portfolios, all managed by Vanguard’s experienced investment team. The fees are among the lowest in the industry, making it an attractive option for cost-conscious savers. The plan is available to residents of all states.

Key Features of the Vanguard 529 Plan:

• Low Fees: Vanguard is known for its low-cost investment options, and the 529 plan is no exception. The expense ratios are among the lowest in the industry.
• Diversified Investment Options: The plan offers a range of age-based portfolios and static allocation portfolios, providing investors with a variety of choices to suit their risk tolerance and time horizon.
• Strong Performance: Vanguard’s experienced investment team has a proven track record of delivering strong performance over the long term.
• Ease of Use: The Vanguard website and mobile app are user-friendly and provide easy access to account information and management tools.
• Available to All: The Vanguard 529 Plan is available to residents of all states, making it a convenient option for anyone.

2. Fidelity Investments 529 Plan

Fidelity Investments offers another excellent 529 plan with a wide range of investment options and competitive fees. The plan features age-based portfolios, target-date funds, and static allocation portfolios, allowing investors to customize their investment strategy. Fidelity’s research and educational resources can also be valuable for those new to investing. The plan is available to residents of all states.

Key Features of the Fidelity Investments 529 Plan:

• Wide Range of Investment Options: Fidelity offers a diverse selection of investment options, including age-based portfolios, target-date funds, and static allocation portfolios.
• Competitive Fees: The fees are competitive with other top 529 plans, making it an attractive option for cost-conscious savers.
• Research and Educational Resources: Fidelity provides a wealth of research and educational resources to help investors make informed decisions.
• User-Friendly Platform: The Fidelity website and mobile app are easy to use and provide a seamless investment experience.
• Available to All: The Fidelity Investments 529 Plan is available to residents of all states.

3. Utah Educational Savings Plan (UESP)

The Utah Educational Savings Plan (UESP) is a highly rated 529 plan known for its low fees and strong performance. The plan offers a range of investment options, including age-based portfolios, static allocation portfolios, and individual mutual funds. UESP is open to residents of all states and has received consistently high ratings from independent rating agencies. The plan is noted for its transparent fee structure and excellent customer service.

Key Features of the Utah Educational Savings Plan (UESP):

• Low Fees: UESP has some of the lowest fees in the industry, making it a cost-effective option for saving for college.
• Strong Performance: The plan has a history of strong performance across its various investment options.
• Open to All: UESP is open to residents of all states, making it a convenient choice regardless of your location.
• Transparent Fee Structure: UESP is known for its transparent fee structure, making it easy to understand the costs associated with the plan.
• Excellent Customer Service: UESP provides excellent customer service, ensuring that investors have the support they need.

4. New York’s 529 College Savings Program – Direct Plan

New York’s 529 College Savings Program – Direct Plan is another top-rated option with low fees and a wide range of investment choices through Vanguard funds. While primarily aimed at New York residents (offering state tax benefits), it’s open to residents nationwide. The plan features age-based and risk-tolerance portfolios managed by Vanguard, providing access to its low-cost investment philosophy. The Direct Plan is known for its simplicity and ease of use.

Key Features of New York’s 529 College Savings Program – Direct Plan:

• Low Fees: Leveraging Vanguard’s expertise, this plan offers exceptionally low fees.
• Vanguard-Managed Funds: Investment choices are based on Vanguard’s well-regarded mutual funds.
• Age-Based and Risk-Tolerance Portfolios: A variety of portfolios are available to match different investment timelines and risk profiles.
• Open to All: While offering tax benefits for New York residents, it is available to residents of all states.
• Ease of Use: The Direct Plan offers a simple and straightforward user experience.

5. ScholarShare 529 (California)

ScholarShare 529, California’s 529 plan, managed by TIAA-CREF Tuition Financing, Inc., provides a variety of investment options, including age-based portfolios and individual fund choices. While California residents may benefit from certain advantages, such as potential state tax benefits, the plan is available to residents of all states. The plan aims to provide long-term growth potential with a focus on affordability and accessibility. ScholarShare is known for its diverse investment lineup and commitment to helping families save for college.

Key Features of ScholarShare 529 (California):

• Managed by TIAA-CREF: The plan is managed by a well-known and respected financial institution.
• Diverse Investment Options: A variety of investment options are available, including age-based portfolios and individual fund choices.
• Open to All: The plan is available to residents of all states, although California residents may receive specific benefits.
• Affordable and Accessible: ScholarShare aims to provide affordable and accessible college savings options for families.
• Potential State Tax Benefits: California residents may be eligible for state tax benefits.

Detailed Comparison of the Top 529 Plans

To help you make a more informed decision, let’s delve into a more detailed comparison of the top 529 plans:

Fees and Expenses:

Fees and expenses are a critical factor to consider. The lower the fees, the more of your investment earnings you keep. Here’s a general overview:

• Vanguard 529 Plan: Known for its ultra-low fees, with expense ratios typically ranging from 0.13% to 0.19% for its age-based portfolios.
• Fidelity Investments 529 Plan: Offers competitive fees, with expense ratios for its age-based portfolios typically ranging from 0.20% to 0.35%.
• Utah Educational Savings Plan (UESP): Features very low fees, with expense ratios for its age-based portfolios generally ranging from 0.13% to 0.18%.
• New York’s 529 College Savings Program – Direct Plan: Boasts very low fees due to its reliance on Vanguard funds, with expense ratios often below 0.20%.
• ScholarShare 529 (California): Offers competitive fees, but they can vary depending on the specific investment options chosen. Expect expense ratios ranging from 0.25% to 0.50% for age-based portfolios.

Investment Options:

The range and quality of investment options are essential. Here’s what you can expect:

• Vanguard 529 Plan: Offers a variety of age-based portfolios that automatically adjust asset allocation over time, as well as static allocation portfolios that allow investors to choose their own asset mix.
• Fidelity Investments 529 Plan: Provides a diverse selection of age-based portfolios, target-date funds, and static allocation portfolios, offering flexibility for different investment strategies.
• Utah Educational Savings Plan (UESP): Offers a range of age-based portfolios, static allocation portfolios, and individual mutual funds, allowing investors to customize their investment approach.
• New York’s 529 College Savings Program – Direct Plan: Primarily uses Vanguard funds for its investment options, including age-based and risk-tolerance portfolios, providing access to Vanguard’s low-cost, diversified investment strategies.
• ScholarShare 529 (California): Features a range of investment options, including age-based portfolios, target-risk portfolios, and individual fund choices, allowing investors to tailor their portfolio to their specific needs.

State Tax Benefits:

State tax benefits can provide additional savings. Here’s a summary:

• Vanguard 529 Plan: While available to residents of all states, it does not offer specific state tax benefits unless you reside in a state that offers a deduction for contributions to any 529 plan.
• Fidelity Investments 529 Plan: Similar to Vanguard, it’s available to all but state tax benefits depend on your state’s specific laws.
• Utah Educational Savings Plan (UESP): While open to residents of all states, Utah residents may receive a state tax credit for contributions. Other states offer no specific tax benefit for using this plan.
• New York’s 529 College Savings Program – Direct Plan: New York residents can deduct contributions up to $5,000 for single filers and $10,000 for married couples filing jointly.
• ScholarShare 529 (California): California does not offer a state income tax deduction for contributions to 529 plans.

Minimum Contribution Amounts:

Minimum contribution amounts can be a factor for some savers:

• Vanguard 529 Plan: Typically has a low minimum initial contribution, often around $25 to start with.
• Fidelity Investments 529 Plan: Often has no minimum initial contribution requirements.
• Utah Educational Savings Plan (UESP): Usually has a low minimum initial contribution, often around $25.
• New York’s 529 College Savings Program – Direct Plan: Usually has a low minimum initial contribution, often around $25.
• ScholarShare 529 (California): Often has a low minimum initial contribution, making it accessible to a wide range of savers.

Overall Performance:

While past performance is not a guarantee of future results, it’s still valuable to review historical performance:

• Vanguard 529 Plan: Generally delivers strong, consistent performance due to Vanguard’s low-cost, diversified investment strategies.
• Fidelity Investments 529 Plan: Typically offers solid performance across its investment options, reflecting Fidelity’s expertise in asset management.
• Utah Educational Savings Plan (UESP): Has a history of strong performance, particularly in its age-based portfolios.
• New York’s 529 College Savings Program – Direct Plan: Performance mirrors that of the underlying Vanguard funds, which generally perform well over the long term.
• ScholarShare 529 (California): Performance varies depending on the investment options chosen but generally aligns with market benchmarks.

How to Open a 529 Plan

Opening a 529 plan is typically a straightforward process. Here’s a general outline of the steps involved:

1. Research and Choose a Plan: Review the various 529 plans available and select the one that best meets your needs based on factors like fees, investment options, and state tax benefits.
2. Gather Required Information: You will need to provide information about yourself (the account owner) and the beneficiary (the student). This typically includes names, addresses, Social Security numbers, and dates of birth.
3. Complete the Application: Most 529 plans allow you to apply online. Fill out the application form with the required information.
4. Choose Investment Options: Select the investment options you prefer, such as age-based portfolios, static allocation portfolios, or individual mutual funds.
5. Make an Initial Contribution: Fund the account by making an initial contribution. Most plans accept contributions via electronic funds transfer, check, or other payment methods.
6. Review and Manage Your Account: Once your account is open, regularly review your account balance, investment performance, and contribution strategy. You can make adjustments as needed to ensure you’re on track to meet your college savings goals.

Tips for Maximizing Your 529 Plan Savings

Here are some tips to help you maximize your 529 plan savings:

• Start Early: The earlier you start saving, the more time your investments have to grow. Even small contributions made early can make a big difference over time.
• Contribute Regularly: Set up a regular contribution schedule to consistently add to your 529 plan. Consider automating contributions to ensure you stay on track.
• Take Advantage of State Tax Benefits: If your state offers a tax deduction or credit for 529 plan contributions, be sure to take advantage of it.
• Reinvest Dividends and Capital Gains: Reinvest any dividends and capital gains earned within the 529 plan to further boost your savings.
• Consider Gift Contributions: Ask family and friends to contribute to your child’s 529 plan instead of giving traditional gifts for birthdays and holidays.
• Adjust Your Investment Strategy as Needed: Review your investment strategy periodically and make adjustments as your child approaches college age. Consider shifting to more conservative investments to protect your savings.
• Understand Qualified Education Expenses: Be aware of what constitutes a qualified education expense. These expenses typically include tuition, fees, books, supplies, and room and board.
• Avoid Non-Qualified Withdrawals: Avoid making non-qualified withdrawals, as they are subject to income tax and a 10% penalty.

Common Mistakes to Avoid with 529 Plans

To ensure you’re using your 529 plan effectively, be aware of these common mistakes:

• Waiting Too Long to Start Saving: Procrastination can significantly reduce the amount you’re able to save for college. Start as early as possible to take advantage of compounding returns.
• Choosing a Plan with High Fees: High fees can eat into your investment earnings over time. Opt for a plan with low fees and expenses.
• Not Diversifying Your Investments: Putting all your eggs in one basket can increase your risk. Diversify your investments across different asset classes to mitigate risk.
• Ignoring State Tax Benefits: If your state offers tax benefits for 529 plan contributions, be sure to take advantage of them.
• Making Non-Qualified Withdrawals: Only withdraw funds for qualified education expenses to avoid taxes and penalties.
• Not Reviewing Your Account Regularly: Failing to review your account balance, investment performance, and contribution strategy can lead to missed opportunities.
• Being Too Conservative Early On: While it’s important to become more conservative as your child approaches college, being too conservative early on can limit your growth potential.
• Overfunding the Plan: While it’s great to save as much as possible, be mindful of potential gift tax implications if you contribute more than the annual gift tax exclusion amount. Also, consider the potential impact on financial aid eligibility.

529 Plans and Financial Aid

It’s important to understand how 529 plans affect financial aid eligibility. Generally, 529 plans are considered an asset of the parent (if the parent is the account owner) and are treated favorably in the financial aid formula. Typically, only a small percentage of parental assets are considered when calculating the Expected Family Contribution (EFC). However, the rules can be complex and may vary depending on the specific financial aid form (e.g., FAFSA, CSS Profile).

If the 529 plan is owned by a grandparent or other relative, it may not be reported as an asset on the FAFSA. However, withdrawals from a grandparent-owned 529 plan can be considered untaxed income to the student, which could potentially reduce financial aid eligibility the following year. It’s best to consult with a financial aid advisor to understand the specific implications for your situation.

Alternatives to 529 Plans

While 529 plans are a popular and effective way to save for college, there are other options to consider:

• Coverdell Education Savings Account (ESA): A Coverdell ESA is another tax-advantaged savings account that can be used for education expenses. However, the contribution limits are much lower than those for 529 plans (currently $2,000 per year per beneficiary). ESAs can be used for elementary, secondary, and post-secondary education expenses.
• Custodial Accounts (UGMA/UTMA): Custodial accounts allow you to save money for a minor, but the funds can be used for any purpose, not just education. The assets in a custodial account belong to the child and are subject to the “kiddie tax” rules.
• Roth IRA: While Roth IRAs are primarily designed for retirement savings, you can withdraw contributions tax- and penalty-free at any time. This can be a useful option if you want to save for college while also having the flexibility to use the funds for other purposes if needed.
• Taxable Investment Accounts: Taxable investment accounts offer the most flexibility, as you can use the funds for any purpose. However, investment earnings are subject to taxation.

Conclusion

Saving for college is a significant investment in your child’s future. A 529 plan can be a powerful tool to help you reach your savings goals. By carefully considering the factors discussed in this guide and choosing the right plan for your family’s needs, you can make a significant difference in your child’s ability to afford a quality education. Remember to start early, contribute regularly, and review your plan periodically to ensure you’re on track. With careful planning and consistent effort, you can help your child achieve their educational dreams.