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What Is a 529 College Savings Plan?

Learn how a 529 plan can help pay for educational expenses.

Using a 529 college savings plan when saving for future education expenses can be an attractive option, as investments in the plan can grow tax-free. In this guide, you'll find what you need to know about 529 savings plan options and how to take that first step to set up a plan and start saving.

We’ll also answer frequently asked questions about 529 college savings plans and provide excerpts from our annual list of 529 plan ratings to help you find the best option for your situation.

What Is a 529 Plan?

Let’s look at the basics of a 529 plan. A 529 college saving plan is an investment vehicle that allows for a tax-advantaged way to pay for higher education costs.

With a 529 plan, you contribute aftertax dollars into an account, in which you can choose from a number of investment options, such as equity funds, bond funds, or a portfolio that gradually de-risks over the investment period. When the time comes, you can withdraw money, tax free (meaning you don’t have to pay capital gains taxes), to cover qualified educational expenses such as tuition, fees, books, a computer, and room and board.

You can also use a 529 plan to pay for graduate school, trade school, and, in some states, even K-12 private education.

Investing Terms Related to This Article

How Do I Choose a 529 Plan?

Step 1: Evaluate your state tax benefit.

A majority of states offer a state income tax benefit if you invest in your state-sponsored plan. Depending on how much you contribute, your income level, and how generous the state income tax benefit is (some states have relatively low limits on how much of your contribution you can deduct), you may want to select your state’s plan, even if it is not highly rated, or carries slightly higher fees. Since every family’s situation is different, it may help to consult a tax specialist to determine the value of this benefit.

Step 2: Use Morningstar to compare plans.

Just as 529 education savings assets hit $386 billion in August 2022, our analysts began reviewing 54 plans that represented 93% of those assets.

In 2022, 34 plans received a recommended rating in the form of Gold, Silver, or Bronze. Morningstar Medalist plans offer investment options that we expect will collectively outperform and exhibit some combination of the following attractive features:

  • A well-researched asset-allocation approach.
  • A robust process for selecting underlying investments.
  • An appropriate menu of options to meet investor needs.
  • Strong oversight from the state and investment manager.
  • Minimal fees.

What Are the Best 529 Plans?

In our Morningstar 529 reports, we highlight the pros and cons of each plan’s investment options. This includes an assessment of the asset manager or investment advisor (such as Vanguard, TIAA-CREF, or Wilshire), the asset-allocation process, and the quality of the fund options available in each 529 plan.

You’ll notice that we break down how many age-based plan options they provide compared to static plan options. Age-based plans are geared towards investors who prefer a hands-off approach. Static plans allow investors to be more involved and find a plan that aligns with their respective risk level.

The following gold-rated plans are the two we’ve assessed to be the best 529 plans available.

Best 529s: Our Gold-Rated College Savings Plans

529 Plan Name

Issuing State

Distribution Channel

Number of Age-Based Plan Options

Number of Static Plan Options

Michigan Education Savings Program 

MI

Direct

10

12

my529

UT

Direct

22

11

Source: Morningstar, Inc. Data as of Nov. 2, 2022.

Michigan Education Savings Program

The Michigan Education Savings Program remains a top-choice for education savers and retains its Morningstar Analyst Rating of Gold.

An effective collaboration between the Michigan Bureau of Investments and its dedicated program manager, TIAA-CREF, results in both a thoughtfully constructed enrollment-date glide path and a compelling investment menu. Michigan, with its investment staff, conducts in-house research and taps participant studies to make informed investment decisions on behalf of beneficiaries. Their dedication to shaping a simple, low-cost plan around their participants’ evolving needs also supports a high rating.

Utah’s my529 Plan

Utah's my529 plan is the only 529 plan that's consistently received a Gold rating since we debuted our ratings in 2012, so it shouldn’t be surprising that this year we’ll continue to rank it as one of the best 529 plans on the market. This plan features a straightforward well-designed target enrollment series, and a unique custom option that allows investors to build their own glide path using Vanguard and DFA funds. State oversight continues to be top notch, with a well-resourced and experienced investment team that draws upon a network of experts in the asset management industry.

Find Your 529 Plan by State
Morningstar rates 529 plans to help you choose the best option whether you are evaluating plans across states or within one state.

What Are My Investment Options?

While 529 plan offerings differ from state to state, the basic structure is similar. All plans provide an age-based or target-enrollment series, which are set-it-and-leave-it investment options that gradually de-risk during the accumulation and savings period. These options can serve as a default choice for most investors, similar to a target-date series for retirement savers.

For investors who want to select their own investments, 529 plans also offer a menu of mutual funds (typically one or two dozen), such as a 60/40 balanced fund, an S&P 500 index fund, or more-specialized funds such as value, growth, or small-cap funds. Plans also provide an FDIC-insured account or a stable-value account as their least risky option.

But unlike brokerage accounts, 529 plans generally do not provide the ability to purchase individual stocks. In fact, families cannot take an active or trading approach to these 529 accounts, as investment changes are only allowed twice a calendar year. Contributions into the account are also invested in your preselected investment option once the check or bank transfer clears. It usually is not possible to deposit the money into a cash account and then decide when to invest.

Do 529 Plans Charge a Lot of Additional Fees?

In addition to the fund expense ratios, 529 investments do carry additional fees, such as program management fees and state fees. (Plans sold through an advisor will also have marketing and distribution fees.) These additional fees in the range of 0.01% to 0.10% would be considered low. Additional fees of over 0.20% (for a direct-sold plan) would be relatively unattractive. Although less common now, plans may also charge enrollment fees, account fees, or statement fees.

Quick Tips About 529 Plans

Here are some takeaways about 529 plans that can benefit both new and veteran investors who are looking to take full advantage of their offerings.

  1. If you calculate an estimate of the dollar value of the state income tax benefit (if it is offered) from your contribution, this can help you decide whether to invest in your state’s plan or search elsewhere for a plan with a higher Morningstar Analyst Rating, better investment options, and/or lower fees.
  2. Know the rules regarding qualified education expenses. Some states now include K-12 private tuition and expenses related to apprenticeships, such as books and equipment.
  3. If the beneficiary does not use the account, the account holder can change the beneficiary to an approved family member, such as a sibling or cousin.
  4. A child can be the beneficiary of more than one plan. For example, grandparents and parents can open a 529 account for the same child.

More About 529 Savings Plans

ABOUT THE AUTHORS

Keith Reid-Cleveland is an editor for Morningstar.
Patricia Oey is a senior manager research analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc.

CONTRIBUTORS

Research contributor: Susan Dziubinski
Designer: Nura Husseini-Yoon
Editors: Ann Sanner King

These research authors and research contributors are employees of Morningstar Research Services LLC.

This content is not intended to be individualized investment advice, but rather to illustrate possible factors that can impact financial decisions. Investors should consider this information in the full context of their own financial decisions.

Read our editorial policy to learn more about our process.