Which 529 Plan is Right for You?



So, you want to save for college? Excellent. Let’s go!

I am a big fan of 529 Plans. In my opinion, they are one of the best tools for college savings.

How do they work? You place after-tax dollars into a 529 Plan, invest the funds, allow the funds to grow tax-free, and withdraw the funds without taxes for qualified, educational expenses. The limits on contributions are incredibly high, and you are able to change beneficiaries pretty easily, as long as the new beneficiary is, at least, part of the extended family.

529 Plans are run through individual states. However, you are not limited to just your state’s 529 Plan. You can use any state’s plan and can even have multiple states’ plans. So, if you live in North Carolina, like me, there’s no problem in using Alaska’ plan, New York’s plan, or Kentucky’s plan.

The ability to choose any state’s plan is both a blessing and a curse for many. The abundance of options can leave some paralyzed, afraid to make the wrong decision. So, how do you know which plan is right for you?

I recommend considering the three R’s—returns, ratings, and rewards.

1. Returns. This is the most important factor when considering which 529 Plan is right for you. Consider the long-term performance of the 529 Plan you select. I am not nearly as concerned about the one-year return as the five and ten-year average return. Any fund can have a good year, but you are not looking to invest for only a single year year, but many years. Therefore, look for plans that provide a consistently solid return over five and ten years.

2. Ratings. Next, consider how the states’ plans compare to one another. Is Alaska’s plan consistently rated higher than New York’s plan or vice versa? And just like returns, consider the five and ten-year ratings. There are several sites that provide these ratings. Make sure you understand what goes into these ratings. Each site can have their own formula. I am going to provide my recommended site for 529 Plan research at the end of this article.

3. Rewards. Some states provide incentives for residents who invest in their own state’s plan. Most of the time, these are tax incentives. Be sure to check out what your state offers. But notice that “rewards” is last on the list. It is highly unlikely that a state’s incentives will make a plan with a less-than-stellar long-term return worthwhile.

So, which 529 Plan is right for you? You now have the tools to answer that question. My personal favorite site for 529 Plan research is savingforcollege.com. I recommend you check it out.

529 Plan are an excellent option for college savings. Take full advantage of one for your future college expense.

© 2020 Art Rainer

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