Your Money

Picking the best 529 plan: You're probably doing it wrong

Key Points
  • State tax deduction is just one factor behind picking a 529 college savings plan.
  • 529 plans held $282.2 billion in assets as of Sept. 30, 2017.
  • Nearly half of all parents say they picked their plan based on in-state tax incentives.
The Washington Post | Getty Images

If you're choosing your college savings plan based solely on state tax breaks, then you're doing it wrong.

More than 30 states, plus the District of Columbia, offer state tax breaks to residents for contributions to a 529 plan — the college savings account families use to save and pay for education on a tax-free basis. Indeed, 45 percent of parents said in-state tax incentives were a factor in their 529 plan selection, according to a survey from Strategic Insight.

But as convenient as it may be to invest in your state's plan just for the tax break, experts actually warn against it.

Other factors matter, too, especially now that the Tax Cuts and Jobs Act allows families to tap a 529 plan to cover up to $10,000 in private elementary and high school expenses each year. As of Sept. 30, 2017, these plans held $282.2 billion in assets, Strategic Insight found.

Deductions are great, but they may not be worth anything if your state's plan charges a lot of fees.
Jonah Gruda
Mazars USA

Important to note: You can choose any state's plan. There is no requirement that you invest in your home state's 529 plan.

Families residing in states that have no income tax, that don't offer a deduction for contributions, or that give a tax break regardless of whether investors choose the home state's plan, all have good reasons to look elsewhere. So may families whose state offers a break on contributions, but has high plan fees.

"Deductions are great, but they may not be worth anything if your state's plan charges a lot of fees," said Jonah Gruda, a certified public accountant and partner at Mazars USA in New York.

"If there's no tax incentive, then find the plan that's the cheapest and has the most investment options," he said. "Those two are the biggest factors."

Here's what to think about.

Investment management

Full exposure to the stock market — especially when it's hitting new highs every day — probably isn't appropriate if your child is two years away from starting college. But it might make sense to take that risk if you're just opening an account for your six-month-old child and you have 18 years to let your savings grow.

Generally, 529 plans offer age-based portfolios, which start off with high equity exposure early on in a child's life and then become more bond-centric and conservative as the college start date approaches.

Tom Merton | Getty Images

Some portfolios slash their equity exposure by 20 to 25 percent in one day as they move toward more conservative allocations, said Leo Acheson, a senior analyst at Morningstar. Such moves are risky if they occur when the market is plummeting.

"In the past you had these big step-downs in equity exposure, but more plans are smoothing their exposure to stocks and bonds and making it gradual," said Acheson.

If you're using your 529 plan to cover private K-12 costs, take a second look at your asset allocation: A shorter time frame may call for less equity risk.


If you're spending less money on account fees and fund costs, then more of your contribution is actually being invested.

Costs you may cover include enrollment and maintenance fees, as well as fund expenses. Investment expenses can vary sharply from one plan to the next.

Consider that costs for the age-based portfolios in the Utah Educational Savings Plan range from 0.17 percent to 0.60 percent, while the NJ Best 529 College Savings Plan has fees between 0.41 percent and 0.91 percent.

Advisor-sold or direct

You can't address costs without considering advisor-sold plans versus direct-sold plans.

As families become more fee-conscious, an increasing number of 529 assets are flowing toward 529 plans you can purchase directly — that is, without the aid of a financial advisor. (See chart below.)

It varies as to whether the advisor's guidance is worth a commission or a separate fee for planning.

"Direct-sold plans are simpler generally because you have a direct investor buying the index," said Acheson of Morningstar.

"Advisor-sold plans tend to have more active underlying managers and higher fees," he said.

When shopping for a 529 plan, be sure to compare advisor-sold plans to one another and direct-sold plans to one another, Acheson said. (See charts below for Morningstar's top 10 direct-sold and advisor-sold plans.)

Direct-Sold Plans Issuing State Morningstar Analyst Rating
Bright Start Direct-Sold College SavingsILGold
Utah Educational Savings PlanUTGold
The Vanguard 529 College Savings PlanNVGold
Michigan Education Savings ProgramMISilver
MOST Missouri's 529 PlanMOSilver
CollegeAdvantage 529 Savings PlanOHSilver
T. Rowe Price College Savings PlanAKSilver
ScholarShare College Savings PlanCASilver
Maryland College Investment PlanMDSilver
CollegeCounts 529 FundALSilver

Advisor-Sold Plans Issuing State Morningstar Analyst Rating
Bright Directions Advisor-Guided 529 ColILSilver
NEST Advisor College Savings PlanNEBronze
New York's 529 Program (Advisor-Guided)NYBronze
BlackRock CollegeAdvantage 529 PlanOHBronze
U.Fund College Investing PlanMABronze
Scholars Choice College Savings ProgramCOBronze
CollegeCounts 529 Fund Advisor PlanALBronze
MFS 529 Savings PlanORBronze

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