- Each state administers its own 529 plan, and eligible investors can invest in any state’s plan regardless of their state of residence.
- You can choose between a 529 prepaid program and a 529 college savings account.
- When choosing the best plan for your needs, take into consideration management fees, investment options, and how the account is managed.
Despite their common origin in the IRS tax code, all 529 plans are not created equal. Each state sponsors its own version of the 529 program, with a wide variety of fee structures and management strategies. Choosing the plan of your state of residence may not always be the best decision. You can open a 529 account with any state, which gives you the flexibility you need to maximize your earnings.
Choosing a 529 Savings Plan: Prepaid vs. Investment?
Before diving into the details of each state’s plan, you have a decision to make. Will you invest in a prepaid college tuition plan or an investment savings account? Some states offer both, and some offer only one or the other.
Since the college savings plan is essentially an investment account, it is most appropriate for families who can tolerate some risk. While investment managers aim to improve the performance of your investments, any account comes with the possibility that your savings will lose value. These programs are primarily popular because they offer significantly more flexibility than prepaid 529 plans.
Prepaid tuition plans permit you to purchase college credits at participating colleges and universities based on today’s tuition rates. Families who are most concerned about the rising cost of tuition usually prefer prepaid tuition plans. However, there are more limitations on what college costs are covered by prepaid credits and which schools will accept payment from these plans.
This table outlines the basic differences between the two programs:
|529 Prepaid Tuition Plan||529 College Savings Plan|
|Guarantee on tuition||Guarantees today’s tuition rates at participating colleges and universities||No lock on tuition rates|
|Qualified expenses||Plan proceeds cover tuition and mandatory fees||Savings can be used for all qualified education expenses, including tuition, room and board, books, computers, and mandatory fees, at eligible institutions|
|Contribution method||Plans are set up with installment payments, with the total amount divided by the age of the beneficiary||Contribution limits are typically quite high, ranging between approximately $200,000 to $500,000|
|Guaranteed returns||Most plans are guaranteed by the state||Savings are subject to standard investment risk and can lose value|
|Age requirement||Most plans are limited by the beneficiary’s age or grade||No age limit on eligibility|
|Residency requirement||Most plans have a state residency requirement||No residency requirement|
|Enrollment period||Most plans have a set enrollment period||Enrollment is open year round|
* The Louisiana 529 College Savings Plan is only available to residents of the state.
Features to Look for in Your 529 College Savings Plan
If you choose to use a 529 College Savings plan, know that each plan is unique in the types of investments offered, fee structure, and fund management strategy, so some accounts will be costlier than others. This can reduce the overall value of your savings. Each year, investment research companies like Morningstar rate the best and worst 529 college savings programs based on these features, making it easier to choose wisely.
In 2015, Morningstar gave the highest rating to four plans: Alaska, Maryland, Nevada and Utah. According to Morningstar, these plans are most likely to outperform their peers over the next five years. On the other hand, South Dakota’s plan received a negative rating for 2015, because the program’s high fees significantly reduce earnings.
How to Open a 529 Plan
Once you have selected the plan you wish to invest in, take the following steps to start saving:
- Gather official program disclosure statements (available online) for your top contenders and read them cover to cover. This will ensure you know all the ins and outs of the programs so you can make a final decision.
- Complete the account application, naming yourself as the account owner.
- Name the account beneficiary, which requires a date of birth, social security number and current address.
- Make an initial contribution and be aware of minimum deposit limits of your plan.
- Consider an automatic funds transfer every week or every month to grow your savings more quickly.
Nothing in this article should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. This article is not intended as investment advice, and Wealthfront does not represent in any manner that the circumstances described herein will result in any particular outcome. Financial advisory services are only provided to investors who become Wealthfront clients.
This article is not intended as tax advice, and Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. Investors and their personal tax advisors are responsible for how the transactions in an account are reported to the IRS or any other taxing authority.
For information on any 529 college savings plan contact the plan provider for details on the investment objectives, risks, charges, expenses, and other important information included in the Plan Description and Participation Agreement; read and consider it carefully before investing.
Please Note: Before investing in any 529 plan, you should consider whether you or the beneficiary’s home state offers a 529 plan that provides its taxpayers with favorable state tax and other benefits that are only available through investment in the home state’s 529 plan. You also should consult your financial, tax, or other advisor to learn more about how state-based benefits (or any limitations) would apply to your specific circumstances. You also may wish to contact directly your home state’s 529 plan(s), or any other 529 plan, to learn more about those plans’ features, benefits and limitations. Keep in mind that state-based benefits should be one of many appropriately weighted factors to be considered when making an investment decision.
Earnings on nonqualified withdrawals are subject to federal income tax and may be subject to a 10 percent federal tax penalty, as well as state and local income taxes. The availability of tax and other benefits may be contingent on meeting other requirements.