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Three weeks ago, I was introduced to a new reason to research 529 plans. Our first child was born and so began the process of setting up a 529 plan. My criteria were threefold: low cost, adequate investment options, and a user-friendly platform. Through my extensive search I summarized the over 50 different 529 savings plans available and will highlight the top six for other Texas residents looking to set up a new plan or roll over an existing plan.
529 college savings plans were established by Congress in 1996 to provide a tax-advantaged college savings vehicle. Operating like a ROTH IRA, 529 plans do not provide any federal tax benefit when contributions are made to the account, but all investment growth and distributions are tax free if used for qualified expenses. Qualifying expenses include tuition, fees, books, room and board, supplies, a laptop, and necessary computer software. In addition, qualified expenses includes tuition for K-12 schools up to $10,000 per year per beneficiary and up to a lifetime limit of $10,000 per borrower can be used to pay student loan principal and interest for the beneficiary or the beneficiary’s siblings. Before we look at a few different plans, for more on how the 529 plan might fit into your current savings plan give this article a glance.
529 Plan Selection
529 plans are operated by each individual state and not created equal. This results in over 50 different unique plans with different investment managers, investment fees, and operational rules. Many 529 plans offer their residents a state income tax deduction for contributions to their state’s 529 plan. However, since Texas does not have a state income tax this is a moot point leaving the door open to over 50 plans for Texans to choose from. The criteria I used to narrow the search was low cost, quality investment options, and a user-friendly platform.
The focal point of my search was low cost investment options. This immediately ruled out over half the plans including Texas. As much as I wanted to support the Texas plan, with fees over four times the amount of other states for an indexed equity portfolio it did not make sense. The leading plans when comparing investment fees can be seen below. Texas is listed for comparison but is not near the top 10 best plans available.
529 Plan Comparison
|State||Provider||Broad Market Index Fee||Age Based Index Fee|
|New York||New York||0.13%||0.13%|
The second criteria (which goes hand in hand with criteria #1is adequate investment selection. There are a few very low-cost plans that only allow CD or other non-market-based investment opportunities which cripples the power of the account to grow and compound. In addition, some states, like Texas, offer very few index and age-based portfolios. The states highlighted above all offer numerous index, age-based, and active mutual fund options at competitive prices.
User Friendly Platform
This criterion became the differentiator for my personal decision. As you can tell, the top plans offer a great selection of investments at similar price points. I have had my brokerage account, donor advised fund, and ROTH IRA with Schwab for years and the deciding factor for me came down to convenience. The ability to have the 529 Plan under the same login and account profile as my other Schwab accounts outweighed the 0.14% higher investment fee over Fidelity. Certain plans such as New York and Ohio are administered on the states 529 plan website. Other plans such as New Hampshire, Nevada, Maine, and Kansas are provided on the custodian’s website as is seen on the previous chart.
You might notice that New York has some of the most competitive fees but is listed as 6 out of 6 on my recommended list. New York’s 529 plan does not allow for distributions to pay down up to $10,000 of student loans over the beneficiary’s lifetime. Each state’s adoption of changes in fedearl law is something to pay close attention to when selecting a plan. The other five plans listed above conform to all federal laws however, some plans like California do not even allow for distributions to be used for K-12 tuition.
While I did do extensive research in selecting the best 529 plan for our new baby girl, please know this is not a binding decision. The IRS allows one 529 plan rollover every 12 months so should you ever get buyer’s remorse, you can always roll the account over to another state’s plan with no consequences. In the end, you cannot go wrong with any of the top six plans listed above but be leery of other plans (such as Texas) with unnecessary cost and limited investment options.