Which 529 Plan Should California Residents Choose?
California has one 529 college savings plan, ScholarShare 529, which is available to residents of any state. Since California does not offer a state income tax benefit for contributions to an in-state 529 plan, California residents may choose to invest in another state’s 529 plan, such as the Ohio, New York, Wisconsin or Michigan 529 plans.
But, there are still a few reasons to consider the ScholarShare 529 plan, such as low fees, solid historical performance and a matching grant.
Investments in a ScholarShare 529 plan account grow on a tax-deferred basis and funds can be withdrawn tax-free to pay for qualified education expenses, such as:
- College tuition and fees
- Books and supplies
- Room and board if the student is enrolled on at least a half-time basis
- Up to $10,000 per year in K-12 tuition
Although California has an income tax, the state does not currently offer a state income tax benefit for 529 plan contributions. A bill was introduced in 2019 to allow California taxpayers to deduct 529 plan contributions up to $5,000 ($10,000 if married filing jointly) from state taxable income. The bill was vetoed, but the state treasurer’s office is still working to get a state tax incentive approved.
California residents are eligible to receive a $200 matching contribution when they open a ScholarShare 529 plan account and contribute at least $25 during 2019. Californians who schedule automatic contributions of at least $25 are eligible to receive an additional $25 matching contribution.
The more a family pays in 529 plan fees, the less they are able to save for college. Compared to other state’s 529 plans, ScholarShare 529’s fees are among the lowest. There is no enrollment fee, application fee or account management fee, program management fees are 0.08%, and total asset-based expense ratios range from 0.08% to 0.57%, depending on which investments are chosen.
According to Savingforcollege.com’s 529 fee study, the 10-year total asset-based fees on a $10,000 investment in ScholarShare would be between $103 and $715.
Variety of investment options
ScholarShare 529 offers a variety of investment options from TIAA-CREF, DFA, PIMCO, T. Rowe Price and others, including:
- Two age-based investment portfolios that automatically become less risky as the beneficiary gets closer to college
- 12 multi-fund portfolios based on a targeted level of risk
- Four individual-fund portfolios, including the Social Choice portfolio, which follows certain Environmental Social Governance (ESG) guidelines
- A principal-protection portfolio
529 plan account owners must select an investment portfolio when they open an account, and they can make investment changes twice per year.
Overall, the ScholarShare 529 plan has been a top-performing 529 plan. The 529 plan ranked 4th and 3rd for the 3- and 5-year periods ended June 30, 2019, respectively, according to Savingforcollege.com’s quarterly performance rankings. Keep in mind, however, that this data represents historical performance, which is not necessarily indicative of future results.
Savingforcollege.com assigns a 5-Cap Rating to each 529 plan, based on performance, costs, features, reliability and whether or not the plan offers any special benefits for residents. Scholarshare 529 received a rating of 4.5 out of 5 Caps, based on data as of March 31, 2019, with the following scores in each category:
- Performance 4.80
- Costs 4.92
- Features 3.90
- Reliability 4.57
- Resident 0.00 (there are no state income tax benefits available for residents)
A good place to start