Before taking the plunge to start investing in your child's education, do some research to pick the best plan for you.
The cost of college continues to rise each year, and parents are increasingly looking to the 529 college savings plan to start saving for their child's education. Between tuition, room and board, and other related costs, the average cost of college seems to increase every year. Most 529 plans are incredibly flexible with respect to who can invest for future higher education expenses.
Why Should You Take Advantage Of A 529 Plan?
While education grants and financial aid can provide many with assistance paying for their education, a 529 makes it easy to save for future education costs by offering tax-advantaged savings and investment. Every US state offers at least one type of 529 college savings options, which will fall into the two categories – either a prepaid tuition program or an education savings plan.
Prepaid tuition programs leverage tax benefits while saving for college – your tuition is locked in at today's rate, not the rate it will be later on when your child begins college. Primarily, these plans are guaranteed by the state you reside in, but some states offer them for non-residents. An education savings plan is by far a more popular option because it allows more flexible access to the funds.
Choosing The Right College Savings Plan
When choosing a 529 plan, it is best to start with your own state's plans, as most plans offer income tax benefits to in-state residents. Most plans offer fairly broad options for asset allocation, such as index funds or target-date mutual funds. While funding of the 529 accounts is normally be done using after-tax dollars, they can usually be withdrawn tax-free if attending an in-state institution.
Below are the best 529 plans for 2020 from different states to give you a better understanding of the different types of 529 plans there are and which states offer the best benefits.
Illinois (Bright Start)
The Bright Start College Savings Plan is one of the top plans available because it offers investment options from eleven different fund companies. When opening an account, you can choose between three investment types, including target portfolios, age-based portfolios, and individual portfolios. While having multiple choices is a great added benefit, Illinois also has one of the most competitive expense schedules across most 529 plans. There is no maintenance fee that you have to pay every year, and to join only costs $25.
Virginia's direct-sold Invest529 plan offers people a variety of features, including low costs, no application fees, and historically strong performance. This plan is one of a handful that are Gold rated by Morningstar. Parents who are more risk-averse or have started saving later on in their child's lives may prefer their FDIC-insured savings account option. Invest529 also offers age-based as well as static portfolio options so most families can find a plan that works for them.
Ohio (College Advantage)
This plan historically generates exceptional returns for most individuals who save with their College Advantage 529 plans. Just like with Bright Start in Ohio, there is no shortage of investment choices. Their age-based portfolio becomes more conservative over time, while their risk-based portfolios can specifically match your desired level of risk and reward.
With respect to fees, Ohio has one of the best options overall, considering their age-based options range anywhere – between 0.19% and 0.32%. This makes it one of the lowest compared to the national average.
California (ScholarShare College Savings Plan)
With no initial application fees, no risk in cancelation fees, and no fees for changing your beneficiary, it's no wonder California's ScholarShare Savings plan is often ranked one of the top in the country. You'll pay only mutual fund fees and the standard program management for your account. To upgrade their national plan rating, they have begun shifting from standard program management to more mutual fund fees to excel in their industry.
Offering thirteen different investment opportunities, it's no shock that Utah's 529 plan has ranked in the top college investment plans for almost a decade. Parents have their choice of seven static portfolio options, four age-based, and two customizable portfolios, leaving everyone a plan that is perfect for their circumstances.
The Michigan Education Savings Program includes a range of plan options. These include guaranteed investments, age-based investments, single-fund investments, as well as multi-fund investments, so most families can find the exact plan they prefer. Distributions from this plan can be used by Michigan residents to pay for any higher education expenses without paying any state income and federal taxes. This makes it a very popular choice for those who currently reside in Michigan and plan on staying in-state for college.
New York (NY's 529 College Savings Program)
Unlike most other states on our list, New York offers a direct-sold plan investment set of options from one single company, Vanguard. Historically, this company is known for its low fees, making it a very popular option for parents. It's also highly popular with their option to create your own portfolio depending on a mix of funds that meet your particular risk tolerance and investment goals.
Their plans allow you to move funds between different portfolios up to two times a year so you can spend the time making your portfolio exactly what you want. This particular 529 savings plan is commonly ranked five stars when it comes to saving for college.
Alaska (T. Rowe Price College Savings Plan)
When you contribute to Alaska's 529 plan on behalf of a particular beneficiary, you can withdraw the money any time, tax-free, as long as it is to pay for any qualified educational expenses. This alone makes the T.Rowe savings plan one of the top choices for families who have started saving later on in their child's life because it is not limited to solely tuition. The earnings are also tax-deferred while invested and remain tax-free when used to aid in any financial expenses directed towards higher education.
Massachusetts (U.Fund College Investing Plan)
This is one of the few on the list that allows you to access your savings for a wide range of educational expenses. Massachusetts UFund Investing Plan isn't just limited to college – it can also cover tuition expenses from Kindergarten through High School, as well as certain apprenticeship fees, and even student loan repayments. This makes it one of the most diverse saving plans in the country. Parents also qualify for in-state and federal tax deductions while saving for your child's future.
Arizona (Fidelity Arizona College Savings Plan)
Arizona's Fidelity plan is available for both residents and non-residents. They feature three different age-based savings plan options, one using index funds, another using actively managed, and the third offering a combination of the two. You will also have your choice of eleven static option offers to ensure getting the exact plan that will benefit you and your child the most in the long run.
Don't Just Look In-State
While there are advantages in investing in your own state's 529 plan, such as income tax breaks, there are plenty of other options to go with when it comes to saving for your child's future. A huge benefit of the 529 college savings plan is that it can be used to pay for college anywhere in any participating network.
If you are looking into other state's plans to find the best one for you, make sure to do some comparison shopping to find the perfect plan and fees you are comfortable with spending.
Before taking the plunge to start investing in your child's education, you should decide if you are better suited for a college savings plan or a prepaid tuition plan, but both are available through countless 529 plans. Many states off both 529 plans and 529 funds.
Coverdell IRA / Coverdell Education Accounts
Even after learning about 529 plans and understanding the best features each state offers, there are some of you out there who feel that this may not be the route you want to take when it comes to saving for your child's college education. A Coverdell Education Account may be the route you wish to take.
Because it's hard to tell the future and hard to know if your child will go to a specific school or go to school in a specific state, you may want to consider a Coverdell account. It's similar to a 529 plan in the sense that it is another tax-deferred account created by the government.
The main difference is that this account can be used at any educational institution. You will only be able to deposit $2,000 per year up until your child graduates high school. After that, you are able to withdraw from the account for educational expenses while still enjoying the tax-deferred status.
Start Saving For College Now
Regardless of which college-savings plan you decide to go with, the most important thing is to open a 529 plan and start early to enjoy the maximum benefits offered. In addition to the tax-deferred status, some of these plans may be eligible for compound interest. Over time, this can ensure a substantial college fund is sitting and waiting for your child when they are ready to enroll.