When picking a 529 plan there are only a few things you need to consider. One of the main things is how you plan on opening a 529 plan, either by working with a plan directly or if you want to work through a financial advisor. The other big consideration is the state plan that you want to open. In this article, we’ll analyze the overall factors that you need to consider before opening your 529 plan.
If you’re ready to get started with a new 529 plan and just need help to choose the one with the best performance, we’ve got you covered. We’ve measured the best 529 plan performance and you can easily find the best one for you and get started on your college savings journey.
Picking the Right 529 Plan
The right 529 plan for you is going to depend on what state plan you want and how you want to open that plan. You can either buy a plan directly or through the help of a financial advisor. Here is how those major considerations work.
Decide What State to Buy a 529 Plan In
Nearly every state has a 529 plan that they’ve started which is administered by a financial institution that oversees your investments. It generally does not matter what state plan you choose as you’ll be able to use the money no matter where you live or where the beneficiary goes to school.
There are a few considerations when choosing what state plan you want. The most important are:
- Tax Considerations: If the state you reside in has special tax considerations on your state income taxes then you may want to use the 529 plan offered by that state. You may not get the income tax benefit otherwise. Many states do not care what 529 plan you enroll in to receive some tax benefits, though.
- Plan Performance: It’s important to understand how well plans are performing if you’re thinking about enrolling your funds. While you can manage your own investments, most will just want the plan to be on auto-pilot. How the plan traditionally performs will allow you to see how your funds might benefit.
If you know what you’re looking for between these two major factors then you should be able to choose a plan. The next thing is to decide how you’d like to buy the plan.
Decide on How to Buy Your 529 Plan
There are two ways to buy a 529 plan: directly and through a financial advisor. If you buy the plan directly then you’ll manage all the decisions on the account and decide if you want to change investments or how much money you’ll devote to the account. If you buy through a financial advisor then they’ll likely manage it for you.
Direct-Sold 529 plans
A direct-sold plan is one bought directly from a state plan. Here are the two most common reasons for buying a 529 plan directly which is a do-it-yourself approach to 529 investing:
- Lower Costs: You will incur lower expenses with direct-sold 529 plans. Broker-sold 529s generally have higher annual costs and may include sales charges of anywhere from 1 percent to 5.75 percent of your contributions. Also, many of the direct-sold 529s (but few of the broker-sold) invest in index funds with low expense ratios. See our list of 529 plans with the lowest fees.
- Tax Deductions: Your state may offer a direct-sold 529 plan with special incentives. If you are a resident, you may be eligible for a state income-tax deduction, a matching contribution, a scholarship or other financial-aid boost, or special protection of your account from creditors. While these benefits will not make your investment decision a slam dunk, they should be factored into the search equation. Research the specific features of your state’s 529 plan to see if any of these apply to you.
The biggest cost to the do-it-yourself approach is the time and effort you will have to invest to research the alternatives and get comfortable with the tax rules and other investment goals that apply to your personal situation.
Advisor-Sold 529 Plans
Broker-sold 529s are offered through advisors and can provide definite advantages as well.
- Professional Help: The most important benefit is that you will be receiving advice from a financial professional that can extend beyond planning for college. A capable professional will attempt to match the right 529 plan to your particular investment goals and risk preferences and help to coordinate your college planning with your other financial objectives, such as affording a comfortable retirement or minimizing potential estate taxes.
- Investment Options: Certain mutual funds are available only through broker 529s.
You can use our ‘Find a 529 pro’ directory to find a financial planner. The planners listed here are tested by us, have access to our professional-level 529 content and tools and many have attended our educational workshops. The directory includes contact information on both commissioned brokers and fee-only financial planners in your area.
Even if you feel capable of doing the research and planning on your own, you may decide that the time you save by using professional financial help is worth the cost which typically will be either commission-based or fee-for-service. Brokers generally receive a commission on the amount they invest. Fee-only planners bill on an hourly basis or charge a certain percentage of the value of your portfolio.
The Bottom Line
Picking a 529 plan is no small task but it also doesn’t need to be difficult. There are plenty of options out there and most of the time any 529 plan that you buy will work well for you. There are som nuances depending on where you live and how you want to manage the investments that could provide more value for you.
Frequently Asked Questions (FAQs)
What should I look for when choosing a 529 plan?
You should look for a 529 plan that has a history of performing well. You may also want to consider whether buying your state’s plan will provide you with any tax benefits.
Should you shop around for a 529 plan?
If you’re buying a broker-sold plan then you may want to shop around and try to reduce the number of fees you’ll pay. Any shopping around for a directly-sold plan is going to involve analyzing the investment performance more than analyzing the lowest-cost plan.
Does it matter what state’s 529 plan I choose?
Ultimately it does not matter what state’s plan you choose when picking a 529 plan. However, you may be missing out on some tax benefits in a few states if you don’t buy the plan from your state.