With 529 Plans, It May Pay to Shop Around
Here's a short list of our favorites.
As we've pointed out in earlier columns, favorable tax treatment is one of the many benefits offered by 529 college savings plans. Earnings in 529 accounts grow on a tax-free basis and, at least until 2010 when the provision is set to expire, qualified withdrawals for educational expenses such as tuition and books won't be subject to federal taxes, either. What's more, most states follow the U.S. government's lead in granting tax breaks on distributions from 529 accounts.
Nearly all states, moreover, confer this benefit irrespective of where the 529 plan is based. For instance, say you open a 529 plan in Virginia with your nephew as the beneficiary. And say further that the young man surprises everyone in the family by getting into Harvard. According to the provisions of Virginia's 529 plan, that's no problem. The account can still be tapped for qualified withdrawals with no tax penalty. Nice, no?
Nice, yes--especially in light of the unstated benefit here: If your home state's plan and tax benefits aren't especially compelling, you have little reason not to comparison shop among 529 offerings and pick the plan that best meets your needs. To expedite your research, we highlight some of our favorite offerings below.
One caveat, however. As my colleague Langdon Healy explains here, it always pays to thoroughly investigate your home state's plan first. Some offer significant enticements such as contribution matching or tax deductions for contributions. Others go the punitive route, bullying investors into staying at home by withholding favorable tax treatment for out-of-state 529s.
If after researching your state's plan, however, you find that it’s lacking, here's a short list of worthy alternatives. And if you happen to live in one of the states we highlight, good for you: You've got ample reason to put your money to work at home.
Utah Educational Savings Plan Trust
Rock-bottom expenses are the heart of this plan's appeal. Managed by Vanguard, the mutual fund industry's leading low-cost provider, the plan features five aged-based and four static portfolios. Most of the underlying funds are index offerings, which cost less and--not coincidentally--tend to do better over long stretches of time than actively managed funds. One drawback is the lack of a static portfolio that includes both stocks and bonds. Otherwise, though, the plan offers ample investment flexibility--and if you're a Utah resident, the state allows you to deduct a portion of your contributions from your state-taxable income.
Maryland College Investment Plan
Up to $2,500 in contributions each year can be deducted from Maryland state taxes, and excess contributions can be carried over to future tax years. The state's plan is a fine choice for nonresidents, too. Fund industry stalwart T. Rowe Price manages the offering and provides plenty of investment flexibility with the plan's seven age-based and three static portfolios. Expenses here are moderate--though not as cheap as the Utah plan's--and the underlying mutual funds are generally topnotch.
This is a terrific plan for those who prefer a tailor-made savings approach. Participants here can assemble their own portfolios by choosing from a wide-ranging collection of strong offerings from American Funds, another of the mutual fund industry's best shops. No age-based portfolios are available, however, and because American is a load shop, investors will have to pony up sales fees to buy into the plan. Expense ratios at the underlying funds are below average, though, and Virginia residents may deduct up to $2,000 in contributions from their state-taxable income each year.
Missouri Saving for Tuition Program
With a generous state-tax deduction for contributions up to $8,000, this option packs plenty of appeal for "Show Me" state residents. Nonresidents should like it, too, thanks in large part to its low costs. The plan's fees rank among the lowest of all those managed by industry behemoth TIAA-CREF, and while the only static option is a 100% equity portfolio, the sensibly designed age-based track is supple, with 10 portfolios that become gradually more cautious as your beneficiary nears college age. A guaranteed option is also available, but because its upside potential is modest at best, we think the plan's other choices are superior.
Louisiana State Tuition Assistance and Revenue Trust (START) Program
The knock against this plan has long been its inflexibility. Indeed, currently the only investment option is a fixed-income portfolio of Treasuries and government-agency debt. But the plan is poised for a major upgrade: Later this year, a clutch of solid Vanguard equity offerings will be added to its lineup. Vanguard plans typically feature numerous static portfolios, three age-based tracks (conservative, moderate, and aggressive), and, as we mentioned above, the group's fees are appealingly low. A state-tax deduction for contributions and a potential contribution match of 14% are powerful incentives for Louisianans. Nonresidents, however, may only participate if their beneficiary is a Bayou Stater.