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.
Morningstar rates about 60 plans, which account for over 95% of all assets invested in 529 savings plans.
Among these plans, in 2021, 32 received a recommended rating in the form of a Morningstar Analyst Rating of Gold, Silver, or Bronze. These Morningstar Medalist plans offer investment options that we expect will 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.
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.
Morningstar also provides additional information about each plan, such as details about the different investment options, including asset allocation and performance, state income tax benefits, and fees.