There are more than 100 state 529 plans available. These college savings accounts are a great way to save and get those tax breaks, but how can anyone compare all those plans?
In this video, I’ll reveal the five biggest factors to compare and find the best 529 plan in any state.
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Comparing 529 College Savings Plans
Nation, we talked last week about the student debt crisis and how one-in-five millennials are still living with their parents. That’s about 15 million grown adults still drinking out of the carton and leaving their socks in the living room.
Now I love my kids but I’m kicking their butts out at 18 and turning their rooms into a man cave!
But that means being ready to pay for college. Maybe not paying for all of it but at least enough that my boy doesn’t get swamped with debt and become the smartest homeless guy outside CVS.
The best way to do this, save money for college, is that 529 college savings plan we talked about last week. With these plans, you not only get an easy way to save but also tax-free returns.
Almost every state has a 529 plan, and most have multiple. In fact, researching for the video, I found over 100 529 plans across the U.S…and that’s too many. How could you possible compare and decide on so many options?
So I want to share five factors you can use to compare and pick the best 529 plan in any state. Remember, you don’t have to use your state’s plan. If your state doesn’t offer a tax break then it might not be the best option anyway.
I want to thank UNest for sponsoring the video. UNest, is an SEC registered investment advisor, that helps you set up and manage your 529 plan. Open your account and UNest will help you pick the right investments depending on how long until you’ll be needing that money for expenses. It combines the ease of working with an online advisor but none of the costs.
For example, UNest charges a flat-fee of $3 a month for accounts under $50,000 instead of a asset-based fee that increases as your account grows. There are no sales commissions with the app and fees on investments are about half what you’ll find with other advisor programs.
How to Pick the Best 529 Plans by State
But let’s get to those five rules for comparing 529 plans by state and the first step is to check for a tax break in your state.
All the money you withdraw for education is tax-free on the federal level but some states will give you a tax break on your state taxes as well. This map shows the estimated tax savings for a couple making a hundred grand and saving $200 a month to their kids’ 529 plans.
Now I want you to notice a few things here to help you pick the best 529 plan for you. Some states don’t have an income tax, the ones in light-brown here, so there’s really no advantage to investing in the state’s college plan. A few other states, the ones in yellow, don’t offer a tax deduction, so again, no help there.
Even the ones in light-blue though, a family making $100,000 a year and investing $2,400 in the 529 plan is only going to save less than a hundred bucks by choosing that state’s 529 plan.
So when you look at the total costs for different plans by state, you really need to keep this in mind. Even if your state offers a tax break for choosing its college savings plan, is how much you save going to be enough against higher fees?
Usually the answer will be yes but not always so I just want you to understand, there’s nothing that says you have to invest in your own state’s plan.
Comparing 529 Plan Fees
Next on your list to compare plans is to check for annual fees on the account.
Nation, as much as I like the idea of a 529 plan, these things can be loaded with fees. That tax break is nice but between annual account fees, management expense on funds and load fees…sometimes you’re not saving much of anything.
These annual account fees can be as high as $35 on some plans and that’s not even the worst of the fees. When we look at the expense on funds next, that’s really where we’ll start to see a difference in these plans.
This next comparison point is to check the investment options and expense fees on the state’s 529 plan.
This is going to be the big one for most plans, the one that helps you decide which state 529 plan to go with.
First is just that choice in investment options. So if you have a 401K at work, you know how this works. The state contracts with a fund provider like Vanguard or Fidelity to offer investment options to savers. The fund then says, “OK, these are the five funds we’re going to offer in the plan and this is how much we’re going to charge each year on your investment.”
So first, you want to check to see that you’ve got a decent selection of funds available in the plan. This is part of the reason I like the UNest app because it invests in the Illinois Bright Directions plan which offers funds from dozens of different providers including Vanguard and T Rowe Price. Each fund provider offers several funds so you’ve got a lot of choices for any need.
Just as important though is the expense ratio charged on each fund. This is the percentage of your total investment that the fund manager is going to take each year to cover admin and other costs.
And this is why you absolutely have to look at those total costs. For example, you might have a plan that charges no annual fee like the Nebraska 529 plan, but it could cost you up to $1,700 over ten years on a $10,000 account. Roughly $170 a year on just that expense ratio on the funds so you have to look at these in addition to those fees.
Commissions in 529 Plans
This next check is a deal breaker for me, checking for load fees on buying or selling in the account.
You’ll notice that a lot of these comparison points are on those fees. It’s so important that you understand the total cost on a fund and be able to avoid the most expensive plans. They’re just not worth it.
And this one, these load fees are a major no-no. These are holdovers from the old mutual fund days and still get investors in a lot of those funds. A load fee is a charge when you buy or sell a fund, usually around 5% of your transaction.
That means invest $10,000 into a plan and you could immediately be out $500 on top of the annual account fee and expense ratio!
There aren’t many funds or plans that still charge these load fees so it’s a deal breaker when you find one. There’s no reason, with all the other fees these funds are collecting, that they should get away with this. Save your money, pick a 529 plan with no load fees.
By now you’ve narrowed your list of best 529 plans to a few and next you want to call up customer service.
Up to this point, we’ve just been comparing numbers so that’s easy enough. You also want to make sure you’re getting the best customer service though.
So here you’re going to have to play sneaky a bit and call up the 529 plan’s customer service with a problem. Note how long it takes to reach someone, if you have to dial through a maze of touch-tone options first, and maybe even how polite the rep is on the phone.
Believe me, if you ever have a problem and need to call customer service for real, great service may be worth that extra few bucks a year in a plan.
The UNest app makes all this easy through one of the best 529 plans in the country, the Illinois Bright Directions program. You’ll get options in dozens of fund providers including Vanguard and T. Rowe Price. You’ve got lots of options here like age-based and target funds. UNest is just $3 a month for accounts under fifty-grand and will recommend funds depending on your child’s age.