Choosing a 529 College Savings Plan? Do Your Homework!

One of the more highly-touted college education savings plans is the 529, so named after Section 529 of the Internal Revenue Code. Designed to help families set aside funds for future college costs, 529 Plans can be utilized to pay the costs at qualified colleges all across the nation.

However, when it comes to specific 529 plan options, investors must realize that not all plans are getting the job done.

Popular Saving Option

In recent years, the 529 college savings plan has been growing in popularity. One key element of 529 plans is that they are not state specific. In most cases, students can live in one state, use a 529 plan from another state for investment purposes and then choose to attend school in some third state.

Plans can differ state by state so it is important that investors do their homework. While dollars that go in are taxable at the federal level, all earnings are free of future tax liabilities. In addition, some states offer tax breaks on some of the ingoing dollars.

Complicating the concept however are two distinct forms of 529 plans. Savings plans which work very much like a 401K or IRA. Such a plan will offer various investment options to the investor.
Prepaid plans allow students to pre-pay all or some of the costs of an in-state public college education. These plans can later be converted for use at private and out-of-state colleges.

Critical Data

Since funds are available in every state yet vary from state to state, it is imperative that students and parents research the various options available. Morningstar.com is a site that independently evaluates 529 plans and publishes their findings publicly every year.

Given the impact of the recent economic downturn on everyone’s investments, it is easy to see why the selection of a particular plan is extremely critical. Morningstar thoroughly analyzes plans, focusing on asset-allocation, fees, flexibility, and the overall quality of the underlying investments.

Within those categories, one of particular note involves fund flexibility based on the prospective student’s age. Such options are critical for investors to adjust risk tolerances based on when the money would be needed.

The recent economic downturn hammered home the point that mutual fund investments are volatile. Plans that did not allow investors options to reduce risk and lock in earnings as the student neared college age were particularly problematic in the recent downturn.

Five Best and Five Worst

Remembering that one can likely invest in any state (though specific state tax benefits are available only for residents), the top five plans according to Morningstar are:

• Ohio CollegeAdvantage 529 Savings Plan;
• Indiana CollegeChoice 529 Direct Savings Plan;
• The Utah Educational Savings Plan Trust;
• Virginia Education Savings Trust;
• Virginia CollegeAmerica 529 Savings Plan.

For those who like strong track records, the Utah plan has long been a favorite of Morningstar while the two Virginia plans were also on the top performer list of a year ago.

On the poor performer side:

• Nebraska State Farm College Savings Plan;
• New Jersey Best 529 College Savings Plan;
• Montana Pacific Life Funds 529;
• Ohio Putnam CollegeAdvantage;
• Nebraska AIM College Savings Plan.

Again, for those who consider the most important item to be a fund’s ongoing-track record, the public should really think twice about Ohio Putnam CollegeAdvantage and Nebraska AIM College Savings Plan. Both are holdovers from last year’s worst performers (though praise is given for changes in the Ohio Putnam plan).

Other Funds

For those wanting to research the funds within their home state, a 529 Plans link is available. Just remember to think through your home state’s plan, particularly if it offers in-state income tax deductions, matching grants or other benefits for state residents. These factors can truly tip the scales towards selecting a solid in-state option over a high-ranked out-of-state plan.

And for more info on saving for college, info that includes saving options in addition to 529 plans, try this Morningstar “Guide to College Savings.”

Leave a comment