Top 529 Plans: How to Choose the Best 529 College Savings Plan comments (3)

By Wendy Mihm | Monday April 25, 2011

Since I wrote the article “The 529 Plan vs. the Coverdell,” I’ve gotten quite a few emails and calls from friends with questions about how to choose the best 529 plan, and the specifics of how the plans work. So I’ve written this simple 2-Rule Guide on how to choose one of the top 529 plans, and then listed some simple facts about how they work.

First, let me say that you are a big rock star getting ready to select a 529 plan in the first place—investing for your child’s college education is a wonderful (and responsible) gift of love. There are a lot of great 529 plans out there, and the only really enormous mistake you could make would be to miss out by not investing in any of them.

Having said that, there are 2 key rules of thumb you can follow today, that will help maximize your kids’ money for college tomorrow.

Rule 1: When Choosing a 529 College Savings Plan, Keep State Tax Deductible Status In Mind.

You can enroll in a 529 plan from any state in the nation, regardless of where you live, regardless of where your child lives, and regardless of where your child ends up going to college.  However, if you live in one of the following states or the District of Columbia, where the contributions you make to your child’s 529 plan are tax deductible, it really makes sense to choose a plan within your home state.

Here’s the list of states where 529 plan contributions are tax deductible:

  • Alabama
  • Alaska
  • Arizona
  • Colorado
  • Connecticut
  • D.C.
  • Georgia
  • Idaho
  • Illinois
  • Indiana
  • Iowa
  • Kansas
  • Louisiana
  • Maine
  • Maryland
  • Michigan
  • Mississippi
  • Missouri
  • Montana
  • Nebraska
  • New Mexico
  • New York
  • North Carolina
  • North Dakota
  • Ohio
  • Oklahoma
  • Oregon
  • Pennsylvania
  • Rhode Island
  • South Carolina
  • Utah
  • Vermont
  • Virginia
  • West Virginia
  • Wisconsin

Why?  Because if your state is listed above, there is a good chance the money you’ll save via your tax deduction will overcome any differences in higher fees charged by the plans offered in your state.  But just to be safe, it wouldn’t hurt to have a look at the to plans we’ll show you in the next section.

Rule 2: If You Can’t Write Off Your 529 Contributions, Shop Nationally Based On Lowest Fees.

If you don’t live in one of the states listed above, you can’t deduct your 529 plan contributions. This means you can shop nationally, not just your home state.  Your key thing to watch out for are the fees. 

There are all sorts of different fees: “management fees,” “maintenance fees,” “annual fees,” whatever the fund chooses to call them, your job is to be aware of them before you sign up for the fund. Why?  Because they can really eat into your returns year after year. Over time, these fees can make the difference between a mediocre fund and a great fund. They also tend to vary a lot by state, by broker or by individual fund, so look carefully before you sign up.

Here Is a List of the Best 529 Plans

This is a link to Kiplinger’s Best Plans. I like this particular link because Kiplinger offers their bests in several categories, such as “best for low fees,” “best for overall investment mix,” “best for conservative investors,” etc.  Plus it’s linked to phone numbers, in case you want to speak with an actual human.

What If You Change Your Mind About the 529 Plan Later?

You are allowed to transfer your 529 funds to another 529 plan without penalty up to once a year. To do so requires the proper paperwork from both the 529 fund you are leaving and the one you are transferring to.

Can My Child Spend 529 Funds In a Different State or Country?

It doesn’t matter where your 529 fund is established versus what state your child chooses for college. He or she can attend college in any state and spend the funds you saved in your 529 plan.  In fact, you child can even attend college in one of hundreds of qualifying foreign colleges as well! As long as your student qualifies for federal financial aid, he or she can use 529 plan funds to pay for approved education expenses without losing any of the tax benefits, as long as the money is spent on appropriate, education-related expenses.

Got more questions? Leave ‘em in the comment section and I’ll either answer them there directly there, or you just might inspire me to write another article on saving money for college.

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Comments for Top 529 Plans: How to Choose the Best 529 College Savings Plan
By Adelle on May 04, 2011

Finally! I’ve been looking for something online that would break down the 529 choice into something simple like this.  I discovered “FRxWendy” on Twitter and followed her to this article.  Thank you for the clarification, FRxWendy!

By Susan Golden on May 16, 2011

Thanks.  After your article I’m about to pull the trigger on a 529 plan (finally)! I heard on the radio that you should put the 529 plan in your name rather than your kids. That way if one child chooses not to go to college you have more alternatives. Any thoughts on this?

By Wendy Mihm on August 10, 2011

Hello Susan,
Yes, when you set up a 529 plan for your child, you are the holder (or the “custodian”) of the plan and the child is the beneficiary.  You control the money until the funds are dispersed when the child enters college.  If the child does not go to college, or does not use any or all of the money, you can name a different beneficiary.  Thanks for the excellent question!

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