Best 529 Plans – College Savings Plans for Kids

Best 529 Plans - College Savings Plans for Kids [Free Investor Guide]
Best 529 Plans - College Savings Plans for Kids [Free Investor Guide]

Summary: In this article, you’ll learn about  the top rated best 529 plans. Topics include, plan basics, plan rules, a list of qualified expenses, contribution limits, tax advantages, and the pros and cons of 529 college savings plans. 

Introduction

Three in 10 parents use a 529 college savings plan, according to Sallie Mae. However, the average savings in 529 savings account is around $5,500. Just 56 percent of parents are actively contributing to a child’s college education fund, with an average of only $18,135. 

The problem: with today’s rising tuition rates and college expenses, $5,500 in savings is unlikely to make much of a dent toward those costs. 

 It’s important to note that your child will benefit the most from a 529 account the earlier you open one and start making contributions.  Why? Because the best 529 accounts make your money work over time. They include low management and administrative fees and invest in high-performing mutual funds. 


What is a 529 Plan?

What is a 529 Plan

A 529 is a college savings plan that provides tax and financial aid benefits. There are two types of 529 plans including (1) college savings plans and, (2) prepaid tuition plans. Additionally, all 50 states offer at least one 529 plan. A group of private colleges and universities also operate a 529 plan, if that’s the route parents want to go. 

529 Prepaid Tuition Plan vs Savings Plan

The 529 savings plan seems to be the most popular option  among families. But there is another way to make sure you are ready for college expenses that may work better for your family. Prepaid tuition plans are just that, pre-paying for future college costs. 

Currently, there are 18 state-sponsored and one institution-sponsored prepaid plan (Private College 529 Plan) options. However, only 11 of these prepaid plans are accepting new applications, and nine plans that come with residency requirements. 

With a 529 prepaid tuition “contract” plan, you are essentially paying for a certain number of semesters. With a “unit” prepaid tuition plan you can buy units that are redeemable in the future, based on average tuition rates. 

With all this in mind, you typically won’t have to choose between one plan or the other. People may benefit from utilizing both types of plans.


529 Plan Rules

The IRS authorized a tax-free status for qualified tuition programs under section 529 in 1996. Any earnings accumulated in a 529 plan are tax-deferred and distributions are not federally taxed if used for qualified higher education expenses. 

529 Plan Qualified Expenses

529 Plan Qualified Expenses

The definition of qualified higher education expenses has expanded over the years. 529 plan funds are specifically used for the purchase of the following education expenses: 

  • Tuition
  • Fees
  • Room and board
  • Textbooks
  • Computers
  • “Peripheral Equipment” (aka a printer)
  • Up to $10,000 annually in K-12 tuition

There are a few exceptions to qualified distributions, which include the following: 

  • If the beneficiary receives a scholarship. You may withdraw money equal to the amount awarded (money withdrawn will be subject to taxes, but won’t receive a penalty). 
  • Parents can change the beneficiary on the account at any time. For instance, your oldest child decides not to attend college, the name on the account can be changed and funds may be used for your next child.

Pros and Cons of 529 Plans

In our next sections, I will lay out the pros and cons of 529 plans and how to determine the ideal 529 savings plan for you and your child.

Pros of 529 Plans

Below I will share some excellent reasons to invest in a 529 college savings plan in order to save for your child’s education.

Tax Benefits

Pros of 529 Plans

When you sign up for a 529 savings plan, all of your contributions into that account will be tied to the stock market. As such, your contributions should grow with the market over the long-term. A significant benefit to these savings plans is that you don’t have to pay federal taxes on any gains. And in most cases, you won’t have to pay state taxes on that growth. That is, as long as the beneficiary uses the money for qualifying education expenses. 

No Set Limit on Contributions

As stated by the IRS, “contributions cannot exceed the amount necessary to provide for the qualified education expenses of the beneficiary.” 529s differ from other tax-advantaged accounts, like a traditional and a Roth IRA. That’s because the IRS has not set a specific contribution limit for 529 plans. However, many states have set limits on how much you may contribute, typically $300,000 or more. We’ll go over 529 plans by state later in the article. 

Flexibility

Certain 529 plans give the account holder the option to change the beneficiary to a different family member. These college savings plans are appealing because they offer flexibility, should anything change. If your eldest child opts out of going to college, the 529 plan may be transferred to the next child’s name.

Minimal Impact on Financial Aid

While a 529 plan can affect college financial aid, it only does so minimally. How it impacts financial aid varies depending on who owns the account. So if the 529 plan is owned by the parent or student, grandparent or anyone else, financial aid will be impacted differently. For more details on how 529 plans affect financial aid, visit here.

Your Money Moves With You

Another great thing about a 529 college savings plan is that you can transfer the money from state-to-state. The money from the savings account can be used for any college your child chooses.  

Cons of 529 Plans

Next, I will go over some disadvantages of investing in a 529 college savings plan and why parents may consider going a different route.

Upfront Costs

With a 529 prepaid tuition plan, you will be paying for college credits in advance and out of pocket. Some 529 savings plans have minimum contribution requirements. For instance, certain states require an initial deposit to open a 529 account, usually between $500 and $1,000. Additionally, most states require minimum contributions each month, anywhere between $10 and $50. 

Cons of 529 Plans

10% Penalty on Non-Qualified Withdrawals

When money in a 529 college savings plan is used for something other than a qualified education expense, a 10% fee will be applied. Overestimating on education expenses for your child may result in a loss of tax benefits and increased fees. 

Penalties for Early or Poorly-Timed Withdrawals

Many parents expecting to pay an upcoming tuition bill will withdraw money from a 529 savings account without much thought. However, withdrawals for qualified education expenses must be made during the same year. It’s also important to be aware that if more than $14,000 are withdrawn for tuition in a year, that amount may be taxed as a gift by the IRS. Check with your plan provider to make sure you’re following all the rules and guidelines associated with a 529 account.

Less Control Over Investment 

If you are an experienced investor, a 529 college savings plan may not offer the control over an investment that you are looking for. For example, you can only change how you are allocating the plan’s balance twice a year. 

Interested in other ways to save for your children’s college expenses? Check out my recent article here.


Best 529 Plans For 2019 & 2020

Best 529 Plans for 2019 and 2020

The best 529 plans for 2019 and 2020 will be divided into subcategories and rated based upon those categories. We will share the top three “best rated” plans, “lowest fee” plans, and “best-performing” plans over a 5-year period. 

Best Rated 529 Plans

Below are the college savings options with the highest rating based on a 5-cap rating system. These top rated plans offer investors all around excellence. For more details on the rating criteria can be found here.

1- Ohio’s, College Advantage

Best Rated 529 Plans
  • Rating: 5 stars
  • Fee Score: 5 stars
  • Performance: 5 stars

2- New York’s College Savings Program – Direct Plan

  • Rating: 4.5 stars
  • Fee Score: 5 stars
  • Performance: 5 stars

3- Edvest, Wisconsin’s College Savings Plan

  • Rating: 4.5 stars
  • Fee Score: 5 stars
  • Performance: 4.5 stars

Lowest Fee

Additional fees can cut into your savings plan earnings. Below are the plans with the lowest fees. For more details on rating methodology, click here.

1- SMART529 WV Direct College Savings Plan

Lowest Fees 529 Plans
  • Rating: 5 stars
  • Fee Score: 5 stars
  • Performance: 4.5 stars

2- Future Scholar College Savings Plan (Direct-sold)

  • Rating: 5 stars
  • Fee Score: 5 stars
  • Performance: 4.5 stars

3- New York’s College Savings Program – Direct Plan

  • Rating: 4.5 stars
  • Fee Score: 5 stars
  • Performance: 5 stars

Best Performing Over 5-Years

The following plans have produced the highest returns over the past 5-years.

1- Ohio’s, College Advantage

Best Performing Over 5 Years 529 Plans
  • Rating: 5 stars
  • Fee Score: 5 stars
  • Performance: 5 stars

2- New York’s College Savings Program – Direct Plan

  • Rating: 4.5 stars
  • Fee Score: 5 stars
  • Performance: 5 stars

3- ScholarShare 529

  • Rating: 4.5 stars
  • Fee Score: 5 stars
  • Performance: 5 stars

Please note that “direct-sold” plans refer to 529 accounts where you don’t have to pay a financial advisor any commission for contributing. Whereas, “broker-sold” plans usually come with additional fees and commission for making contributions. I would avoid these accounts, if possible. Look for plans that are low cost and high performing.


Opening a 529 Plan by State

While every state offers at least one option for a 529 plan, it’s important to understand how plans differ from state to state. You will want to research the details, features and benefits of your state-sponsored 529 college savings plan. You can also compare both state and institution-sponsored plans to help determine the best one for you. 

Determine Your Ideal Savings Plan

When deciding on the right college savings options for you, consider what exactly you’re looking for. Your ideal characteristics may include:

  • Income tax incentives for making contributions
  • Proven track record of investment growth
  • Lowest fees
  • Best independent ratings
  • An easy-to-use website with responsive customer service

What To Do Next?

Here is what you need to know before selecting a 529 college savings plan:

  1. Does your state offer tax breaks? The reason it’s important to start with your home state’s plans, is because many offer write-offs for contributions on your state income tax. 
  2. Choose the “Age-Adjusted Portfolio”. Just like most retirement accounts, fund portfolios are allocated based on a child’s age. Meaning, the invested funds start out mostly in stocks (higher risk, higher reward potential) and then slowly shift to bonds and cash (lower risk) over time. Age-adjusted portfolios are typically on auto-pilot and require little to no maintenance. 
  3. Make Saving a Family Affair. Because there are no set contribution limits on 529s, anyone is allowed to contribute. Make saving for your child’s future education a family affair and take advantage of putting money from birthdays, holidays, graduations, etc., into a 529 account. While the parents (the trustees) and the child (the beneficiary) have control over the accounts, grandparents, uncles, aunts, and friends should feel encouraged to contribute to a child’s college account and secure their future education. 

Conclusion

Finding the best 529 plans in order to start saving for your child’s future education should be a high priority among parents, grandparents and guardians. College savings plans are meant to help reduce the stress of education-related expenses for both parents and beneficiaries. Set your child up for success by choosing the best college savings plan for your family.

For more information on other types of college savings plans and investing alternatives, check out a recent article HERE.



Sources:
www.bankrate.com

www.daveramsey.com

www.forbes.com

www.smartasset.com

https://studentloanhero.com

www.thesimpledollar.com

www.reviews.com

www.savingforcollege.com

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