My latest challenge recently was choosing the best (or one of the best) 529 plans for my son, Elek who is currently 3 years old. I had been putting this off for quite some time because it is very overwhelming. There are more choices than there are states and the ones you would be interested in greatly depend on which state you live in. Some 529s don’t allow you to participate unless you live in the state in which it is offered. Others allow anyone to participate. Some 529 plans that are offered allow you a state income tax deduction up to a certain amount.
Let’s briefly go through most of the advantages and disadvantages of 529s, which you’ll need to know.
|State income tax deductions (also tax deferred/exempt growth)||You are limited to the investment options within the plan|
|The owner of the account maintains control of the 529||Money withdrawn from the account not used on college expenses is subject to a 10% federal tax, earnings will be taxed as regular income, and possibly past state tax deductions|
|Low minimum startup requirements and contribution requirements||A 529 may affect the beneficiary’s ability to receive grants or scholarships (A workaround to this is if the owner of the account is the grandparent.)|
|A 529 account can be an easy “automatic” approach to saving for college|
|Anyone can open a 529 for anyone else (Also anyone can contribute)|
|These plans are relatively low cost|
|The plans are very flexible (you can choose to move your 529 to another plan)|
|The total amount in the account can be substantial (over $300,000 in some plans)|
Now we get down to business. Let’s start with the state you’re in. I, for example, am in Tennessee which has no state income tax (offset by their massive sales tax). This means that there’s no financial reason for me to limit my choice to my state. On the other hand, if you live in a state like Ohio, there’s no reason to go outside of your state since you can deduct up to $2,000 per beneficiary, per calendar year off your state income. If you’re lucky enough to live in a state that allows deductions for contributing to a 529 plan, then that greatly narrows your choices. The choice was not so easy for me since this was not a factor in my decision.
I started my research of 529 plans with people that I knew had used a 529 or something similar. My dad used the Tennessee BEST program for me when I went to college. My wife’s boss currently uses a 529 plan from the state of Kansas. I thought that those look OK, but how do they compare with the other states’ offerings? Which one is truly the best for my son? Well to answer those questions I turned to everybody’s pal Google as usual hoping to find a list comparing the multiplicity of available plans.
I relied heavily on four of the best sites that I (or rather Google) found and I weighted them in the following order:
- Morningstar’s “The Best and Worst 529 College-Savings Plans”
- Consumer Report’s “Some of the best and worst 529 plans”
- “Kiplinger Top Plans”
- MSN’s “The 5 best college-savings plans”
Essentially I cross referenced the plans on all of these sites hoping to find one that was on all of them. I thought it was odd at the time, but not many were listed on multiple sites. In retrospect, this fact leads me to believe that there is no really “best” 529 plan, but rather each individual needs to choose a plan based on his/her needs. This can be annoying because it adds to the work on the part of the individual looking for the best 529 plan. That being said, I came up with a list of about six 529′s that the articles indicated were the best. I made sure to avoid all of the schools listed in the “worst” category of any of the listed sites. Below is a listing of the best/worst and the ones I narrowed down using my own opinion/needs.
|Ohio (Ohio Tuition Trust Authority)||Ohio (Putnam CollegeAdvantage)||Ohio (Ohio Tuition Trust Authority)|
|Rhode Island||New York|
* Number of times the plan appeared
Now that I had narrowed my candidates significantly I decided that cost of the plan would be the next deciding factor. You can find the costs per state at collegeanswer.com.
This is finally how I arrived at my final answer, which was Ohio (Ohio Tuition Trust Authority). Another benefit to this particular plan is that you can get a $25 referral for both you and the person referring you when you sign up and enter their referral code (mine is 2524394). I believe this only goes on until Dec. 15th, 2009 at which point they may cancel the referral program or they may extend it. There’s also another benefit to this plan where you can earn $25 for just setting up recurring monthly electronic fund transfers or payroll deductions for at least 90 days. You can read more about both of these programs at collegeadvantage.com. I’m sure other states’ plans have similar referral programs, though I haven’t seen them.
Those interested in receiving the $25 referral for signing up for this 529 account, follow the steps below:
- Enroll online
- During the enrollment process it will ask you for a referral code. Enter 2524394.
- After you complete your account enrollment, 7-10 business days later you will receive a $25 credit in your 529 account. (I will get a $25 credit as well.)
- Also don’t forget to set up your recurring monthly electronic fund transfers or payroll deductions to receive another $25 after 90 days.