If you’re looking to save for a child’s college education expenses, there’s no better way to do it than with a 529 plan. But depending on the state providing your plan, the advantages and disadvantages of each plan can vary widely.
Let’s take a look at some of the variables you need to consider when choosing a 529 plan, and which states offer the best options.
How to compare 529 plans
Because 529 plans are not regulated on the federal level, every state is allowed to provide its own 529 plan. Parents are allowed to choose a 529 plan from any state, so it’s wise to compare different ones ahead of time. Here’s what to look for in a 529 plan:
Every state has its own policy on what kind of tax break is available for people who contribute to a 529 plan. Many states offer tax deductions, which will decrease your taxable income. For example, let’s say your taxable income is $100,000, and you contribute $1,000 to a 529. Now, your taxable income will be $99,000.
Some states offer tax credits for 529 contributions. A tax credit will directly reduce how much you owe in taxes. Tax credits are a much better deal than a tax deduction, but only Indiana, Utah, and Vermont provide a tax credit for 529 contributions.
Minnesota provides either a tax credit or deduction depending on your income. Lower-earning families may qualify for the tax credit, while higher-earning families may only qualify for the deduction.
Some states only provide a tax break if you use that state’s 529 plan, but there are seven states that still let you claim the tax deduction even if you use another state’s 529.
These states include:
If you don’t live in one of the states listed above, then you’ll only get a tax break if you use your own state’s 529 plan.
When you open a 529 plan, you are able to invest the money in the stock market just like you would invest the money in an IRA or 401(k). Investing your 529 contributions can help your contributions grow, so your child has more money to pay for college.
A 529 plan is like a 401(k) in that the state determines what kind of investment options are available. Some states offer a better or wider variety of investment options than other states.
Not all investments are created equally. For example, some investment options are more diversified and are therefore less susceptible to market downturns. That can translate to your 529 plan growing more over time with a higher rate of return than another plan.
When you invest 529 contributions in the stock market, you will often pay several different kinds of fees. The most important fee to compare is the expense ratio, which is charged as a percentage of the total amount in the fund.
The higher the expense ratio, the more you’ll pay in fees. Even a seemingly small difference can have a huge impact. For example, if the 529 plan fee is .3% and you have $50,000, you’ll pay $150 in fees. But if the fee is .03%, then you’ll only pay $15 in fees. That’s a huge difference.
State 529 plans may have a wide range of fees. If you can only use your state’s own plan to qualify for the tax break, make sure to compare the investment options. Choose a plan that has a low expense ratio.
If you’re not sure how to choose a plan, consider contacting a financial planner who specializes in college planning. They can go over the various options and help you find the best one. They can also advise you on how much to contribute every year to reach your college savings goal.
Mark Kantrowitz, author of How to Appeal for More College Financial Aid, said parents may have to choose between getting the tax break for 529 contributions or choosing a plan with low fees.
“If you have to choose, focus on low fees when the child is young and switch new contributions to an in-state 529 plan if the state offers a state income tax break when the child enters high school,” Kantrowitz said. “That’s where there’s an inflection point between low fees and state breaks.”
Best 529 plans
If you’re not eligible for a state 529 tax break or want to choose the fund with the lowest fees, here are the best picks for 529 plans:
New York’s 529 plan has one of the lowest fee structures among all state plans. They only charge .13%. They also do not charge any commissions, advisor fees or account maintenance fees.
New York parents can also deduct up to $5,000 in contributions for individuals and up to $10,000 for couples.
Massachusetts is another state with low management fees, ranging from 0.09% to 0.2%. Residents can deduct up to $1,000 in contributions for individuals and up to $2,000 for couples.
Donors can also contribute up to $400,000 total to the account, which is on the higher end of contribution limits.
Louisiana is another state with low expense ratios, ranging from 0.11% to 0.14%. Individuals can deduct up to $2,400 and married couples can deduct up to $4,800 in contributions.
Illinois’ 529 plans have a low fee of 0.105%, and taxpayers can deduct up to $10,000 for individuals and up to $20,000 for married couples. This is one of the highest deductions available among all states.
The fees for Indiana 529 plans range from 0.14% to 0.64%, and the plan offers a wide variety of investment options. Plus, taxpayers can get a tax credit worth 20% of their contributions, up to $1,000 in total. Indiana also has a high total contribution limit of $450,000.
There are many options to save for your child’s college education but a 529 plan could be the right one for you. Be sure to check out all the different factors that go into state 529 plans such as fees, tax breaks, investment opportunities, and other benefits each state offers.
If you need more financing options look into getting a private student loan with ELFI.* You can get a student loan to cover the cost of education for an affordable price and flexible rates.