A 529 Plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. Almost every state offers a 529 plan and some even offer multiple types. 529 plans are available to everyone and have no income limitation. However, you can only contribute up to the gifting limits each year. Which plan will give you the most advantageous tax benefits? Which has the lowest cost? Which has the best performance? These are all questions you should ask when trying to choose the right 529 plan. Here are some tips to follow to ensure you get the right plan:
Understand your state’s plans and rules
Different states provide various incentives such as tax enticements, grants, and scholarships, for utilizing their plans. For example, in Pennsylvania contributions to a 529 plan can be deducted for state purposes. New Jersey offers a one-time scholarship of $1,500 to attend one of their state universities. In Ohio, the College Advantage 529 permits taxpayers to deduct contributions from their Ohio taxable income. In addition, each contributor can deduct up to $2,000 per beneficiary, per calendar year, with unlimited carry forward.
Two types of 529 plans
- Prepaid tuition plans – Allows you to buy credits for college at today’s price to be used when your child goes to college. Your money is keeping up with the cost of inflation this way. Check to see if your state offers this plan, since some do not.
- College savings plans – Allows you to contribute money into an account that is invested in mutual funds. You can start out aggressive when they are young and switch to more conservative later as they get older.
Purchase plan directly or through a broker
Nearly half of 529 plans are bought through a broker, which results in extra fees to open an account and contribute. However, almost all states offers direct-sold plans with lower overall fees.
No state incentives, still get rewards
You can still invest in other state plans and get the rewards of saving. For example, Vanguard offers the Vanguard 529 plan and Fidelity offers the UNIQUE College Investment plan.
Lastly, always make sure to check out the performance. Most plans have strict regulations and perform well, but you should always double check the performance and ensure that it’s invested in accordance to your risk tolerances.
By: Kelly Butler, Staff Accountant