With college costs rising and more Americans finding themselves saddled with student debt, 529 plans are becoming a more popular option for those looking to sock away some cash for college.
Assets in the tax-advantaged plans grew by 25 percent in 2012 to $166 billion, according to Morningstar. So how do you choose a 529 plan, and which ones are best in class?
Nearly every state offers a 529 plan, but you can choose any plan you want. However, you should start by looking at your own state’s plan to see if there are state tax benefits you can take advantage of by staying local, said Laura Lutton, director of funds of funds research for Morningstar.
Then, you need to decide what kind of investments you want.
You can manage the investments yourself and go into broad indexes, she said, or “you’re working with a financial planner or adviser who is going to direct you to match your savings with other investments that you might have, as well.”
The plans that top Morningstar’s list are:
• Maryland College Investment Plan
• Alaska T. Rowe Price College Savings Plan
• Nevada Vanguard 529 College Savings Plan
• Utah Educational Savings Plan
“What all of the plans have in common is they have very strong investment options at a reasonable cost,” Lutton said. “So, these are the ones that we have a lot of confidence in their ability to outperform on a risk-adjusted basis over a full market cycle or the life of your 529 investment.”
Tax benefits were given a heavy weight when accessing the plans.
“We found that those tax benefits or other benefits from the state can make up for a lot of ills like higher expenses or maybe some investments that are solid but that we’re not totally crazy about,” Lutton added.
The 529 plans at the bottom of the class, according to Morningstar, are:
• Rhode Island CollegeBoundfund
• Rhode Island CollegeBoundfund Direct
• Minnesota College Savings Plan
• Kansas Schwab 529 College Savings Plan
“In some cases we had some concerns about the investments in the plan,” Lutton said. “In other cases, we thought they were just too expensive.”
There are restrictions on 529 plans – if you take your money for something other than qualified educational expenses, you will be taxed on the earnings and will incur a penalty.
However, while the performance of 529 plans has lagged behind similar mutual funds in recent years, Lutton believes 529s win on the tax advantage.
“Being able to take out those [funds] tax free to offset your college expenses, I think, is really significant and gives us an advantage over a standard mutual fund,” she said.