Every state offers a different 529 plan—here’s how to pick the best one for you
May 29 is nationally recognized at 529 College Savings Day, a day (mostly celebrated by a niche group of higher education experts and personal finance enthusiasts) to draw attention to the tax-advantaged savings plans offered by all 50 states and the District of Columbia.
First created in 1996, 529 plans are state-sponsored investment accounts that savers can contribute to for a beneficiary's education expenses including tuition, fees, books, housing and technology. Savers can choose any individual to be a beneficiary and when funds are withdrawn from a 529 plan for educational expenses, the money earned in the account while it was invested is not subject to federal income taxes, and in many cases state taxes as well.
"Everyone's situation is different, but 529 plans for most people are an excellent choice," says Cliff Robb, associate professor of personal finance at the University of Wisconsin, Madison. "The most important benefits of 529s are the flexibility — flexibility in what you're investing in within those plans and flexibility to pick any state's plan — and the true benefit of tax-free growth upon withdrawal."
Admittedly, the flexibility Robb mentions can also be overwhelming. Savers can choose which state's 529 plan (or plans) they want to take advantage of and many states offer several plans to choose from. Robb says the first variable families should consider when picking the right plan for them is if their local plan includes a state income tax benefit for residents.
Julio Martinez, executive director of the investment board for ScholarShare, California's college savings plan, adds that savers should also consider how old their beneficiary is, how much they are able to save and how aggressive they want to be with their investment strategy.
"I encourage families to look first at their home state programs to see if they have some kind of additional tax benefit, whether it's a tax credit or tax deduction, because that may contribute to their decision to choose their own state. However, with that being said, families are not obligated to stay with their home state plans, and they can shop around and compare fees and compare investment options," says Martinez. "For example, ScholarShare 529 offers 19 investment options that are designed to help families with different savings goals and different management styles."
These different management styles range from passive investment strategies to "socially conscious" actively managed funds. Some are designed to invest funds conservatively and some more aggressively. Understanding when a given beneficiary will start need to use the funds, and how much they will need, are key to deciding which option is best for them.
The College Savings Plans Network (CSPN), an affiliate of the National Association of State Treasurers offers an online tool for individuals to compare plans across each state and lets you see if a plan has tax benefits for state residents, enrollment fees, minimum contribution amounts and more.
Over the past year, 529 plans have ballooned due to growth in the stock market and because families have begun contributing more — perhaps because the pandemic allowed some families to save more and/or because of growing demands to save for college.
"Student loan debt is at an all-time high. We're nationally over $1.6 trillion in student loan debt, and it's become quite the burden on families," says Martinez. "Every dollar you save is $1 less you have to borrow… but when you factor in the tax savings and also the earnings potential, your child could end up with 25% more money in a 529."
According to CSPN, as of December 2020 Americans have saved some $425.2 billion (a 14% increase from 2019) across over 14.8 million 529 accounts.
"The impact of this pandemic has been most harsh on those families with low education levels. The greatest job losses were in that sector," says Martinez. "We think that this was an inflection point for families that were either impacted, or who saw other families being impacted, in terms of valuing what an education can do to mitigate against these kinds of events."
And with the price and value of college increasing, Martinez says his baseline advice is simple: "save as much as you can."
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