Consider Other State’s Plans For Your 529
By David Dierking
If you’re one of the millions of Americans who is looking for the best way for the skyrocketing costs of a college education, you’ve no doubt heard of the 529 plan. 529s are the tax-advantaged plans offered up by the government for the express purpose of saving for college. And every state now offers its own plan presenting a menu of investment options either directly or through a broker.
Most people will assume that they are limited to their own state’s 529 offering (see best 529 plans of 2010). For example, if you live in the state of New York, your college savings options are limited to the choices in the New York 529 College Savings Program. Not true! With a couple of exceptions, you are free to select any state’s 529 plan for your investment. In fact, there are several instances where it’ll make more sense to invest outside your state’s plan.
Numerous 529 programs offer perks such as state tax deductions for contributions and tax-free withdrawal of earnings to state residents who open an account. That means in many cases the best option will be the 529 program in your home state. However, if your state’s program doesn’t offer these incentives or charges high management fees, it may be time to start shopping around.
Start by checking out www.savingforcollege.com to see how your state’s plan compares to others across the country. The website has a great tool for comparing plans and it allows you to filter by criteria such as fees charged, tax benefits and investment options. You’ll be able to select the features that you want your plan to carry and the tool will give you the best choices available.
In the process though, make sure you’re examining the factors that give you the greatest chance for success. The best place to start is by looking at the fees and expenses charged by the fund. This is important because this is perhaps the easiest way to enhance your return. If you have one fund that charges 0.5% in fees and a second identical fund that charges 1.5%, the lower fee fund is going to come out ahead every time. Just a 1% difference in return each year can make a huge impact in 18 years. A higher the expense ratio means more of the fund’s return that is taken away from you.
Another important factor to take a look at is the plan offerings themselves. A good plan will have choices on both the conservative and aggressive ends of the spectrum as well as age-based options that become gradually more conservative as your child nears college age.
Plans from Utah and Virginia are generally the most highly regarded for their combination of low cost, broad investment options and easy access to your account. New Jersey and Nebraska have seen their 529 plans fall in the “worst of” category recently as they’ve been hampered by high fees, overly aggressive investment options and a lack of flexibility.
When it comes to saving for college, you actually have more choices than you think. Knowing what’s available to you and how best to take advantage of it can be the difference between a strong financial plan and years of college loans.
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