Each year, I look through all the commission-free plans offered by states and identify the top picks. This year, I am so excited about my new, updated 529 plan guide! That’s because there is a lot of good news for 2018.
The best 529 plans have the lowest management fees I have ever seen in the history of 529 plans. Fees from some state plans are now so low that only those charging less than .20% per year in total management fees make my “Deans List with high honors.”
So many plans around the country have lowered costs to the point that I have raised the bar to make my “Honor Roll” as well. A number of plans that were on my 2017 honor roll didn’t get worse, they just didn’t improve like so many others.
As far as what’s driving all the cost-cutting across the industry, the direct-sold plans overall have lower costs than in the past for two reasons. As plans have gotten so much bigger, the cost of serving each future college student has gone down. In addition, strong competition among direct-sold commission-free plans has been intense.
If you decide to invest in a plan from my guide, pay close attention to the particular investment choices I recommend in some of the state plans. When you see your state listed below, make sure you only invest in the exact state plan I show. That’s the key. Otherwise you could end up in a stinker of a plan.
And although you can use 529 plan money for school before college in many states, it is best to let your money have more years of tax-free growth for college instead.
Here’s an explanation of how the 529 plan system works
Here’s what you need to know about this great tax-free way to save and spend on a child’s college education!
What is a 529 plan?
A 529 plan is a tax-advantaged savings plan that is the best way to save for your kids’ education. Prior to this year, 529 plans would allow you, a relative or a friend to put money aside as an investment for a child’s college education only.
Now, thanks to changes in the tax code, money in a 529 can be used to pay for tuition at private schools for kindergarten through 12th grade, as well!
With a 529 plan, the money grows tax-free and is spent tax-free for eligible expenses like tuition, books and fees.
One state, many plans
529 plans must be sponsored by a state even though residents of most states can put their money in any state plan. (Just because you invest in the plan of a state where you don’t live, that doesn’t mean your child will have to eventually go to school in that state.)
Even more confusing, a state can sponsor more than one 529 plan. Some states have up to five different plans! I have never found more than one top-flight plan in any one state.
I have a direct link for you to the good plan in a state and you can usually invest directly online. If you just click on my link below, you won’t mess up and go to a bad state option.
If your state is on either my Dean’s List or my Honor Roll, choose it, because there may be state tax benefits that would make it a wiser choice for you.
However, if your state is not listed or you do not qualify for your state tax benefits, put your money in one of the states whose plan has the lowest-expenses. These include California (.11% to .16%), Illinois (.12% to .15%) and New York (.15%). They are my three favorite plans in the country because of extremely low costs.
Age-based portfolios allow you to set it and forget it
When you open a 529 account, do it in your name — not your child’s name. Your child should only be listed as a beneficiary. Assets in a 529 plan have very little effect in the financial analysis of most schools because kids are only listed as the beneficiary, not the owner.
Your money in a 529 plan is invested in a pool much like a mutual fund. I recommend that you look at the investment option available in most plans known as the “age-based portfolio.” This lets the plan seamlessly adjust your investment to a more conservative mix as your child gets closer to college age.
With an age-based portfolio, when your child is two or three, the plan may be heavily invested in stocks. As they reach 15 or 16, the plan will have less stocks and more bonds. This adjustment is done automatically by the fund’s manager. No action is required on your part. It’s true “set it and forget it.”
Warning: Save for your retirement before a child’s education
You and I can’t control education costs. We can’t control investment returns. However, we can save money to defray college expenses and we can choose low-cost plans for our kids’ 529s.
However, I want you to keep this caveat in mind at all times:
While wanting to save for your kids’ education is great, remember my first rule: You shouldn’t save a penny for education unless you are already saving the maximum you can for your own retirement.
The reality is that college can be paid for with grants, loans, scholarships and work. Retirement happens only if you have saved the dough.
What happens if your child doesn’t need the 529 money? In that case, it can be transferred to any other child who has educational expenses and spent tax-free. Or if your child qualifies for a “free ride” full scholarship for college, you can withdraw the 529 money and use it for anything and just pay tax on the earnings.
So if your child winds up not going to college at all and you just take the money for yourself, you pay the tax on the earnings plus a 10% penalty.
For more money-saving advice about college, see our Education section.
Dean’s list with high honors:
These are the very best plans in the country. Put your money here if your state isn’t listed in the Honor Roll.
|Arizona||Fidelity Arizona College Savings Plan (aged-based index only)|
|California||The ScholarShare College Savings Plan (passive age-based option only)|
|Delaware||Delaware College Investment Plan (Fidelity index age-based portfolios only)|
|Illinois||Bright Start (Direct sold index age-based portfolios only)|
|Massachusetts||U.Fund College Investing Plan (Fidelity index age-based portfolios only)|
|Michigan||Michigan Education Savings Program|
|Nevada||Vanguard 529 College Savings Plan (age-based portfolios)|
|New Mexico||The Education Plan Index (age-based portfolios)|
|New Hampshire||The UNIQUE College Investing Plan (Fidelity index age-based portfolios only)|
|New York||New York’s College Savings Program – Direct Sold|
|Ohio||Ohio College Advantage 529 Savings Plan (invest only in Vanguard options)|
|Utah||my529 (Vanguard age-based portfolios only)|
These plans, which showed up in the Dean’s List last year, were all just a hair away from making that cut again this year. “They’re all ultra low-cost, but just a step behind the best,” Clark says.
|Iowa||College Savings Iowa|
|Minnesota||Minnesota College Savings Plan|
|Wisconsin||Edvest 529 College Savings Plan|
If you are a resident of a state below, enter that plan to get state tax benefits and/or lower expenses offered to residents.