Saving for College

What’s the best 529 plan for me?

Use this cheat sheet to help you pick the best 529 college savings plan for your family:

Step one: See if you’re entitled to a tax break. In 33 states plus Washington D.C., residents can deduct a portion of contributions made to an in-state plan. That write-off can be very valuable: A Morningstar study found that, on average, 529 investors who got the breaks reduced their state tax bill by $87 for every $1,000 they saved. That’s the equivalent of an 8.7% return in your very first year. That said, some states’ tax benefits are so tiny, and their plans have such expensive or poor investment options that the tax break alone may not be enough reason for you to stay local.

The map below can help you decide whether to stick with your state’s options. Dark blue means you should choose a low-cost highly rated plan offered by your state. Medium blue means you should choose the best savings plan for you no matter where it is located. In the light blue states, for students older than 14, you should choose the lowest-cost plan offered by your state to take advantage of tax breaks. For younger children, it may be worth forgoing your state’s deduction to invest in a better plan available elsewhere.

Step two: Cut out the middleman. Whether the chart tells you to shop in-state or shop nationally, eliminate advisor-sold plans, and choose a direct-sold plan instead. If you invest directly, more of your money will go to your kids, rather than as commissions to an advisor.

Step three: Choose a plan with fans. Not all 529s are created equally. Some have high fees and lackluster funds, for example, which can drag down the account’s growth potential. You don’t need to do a lot of homework, however, to find a top-shelf plan. If you’re shopping nationally, the simplest and cheapest option is to go with the Utah Educational Savings Plan and pick a Vanguard-managed target date fund. If you’re a more sophisticated investor, you can check out the following plans, which offer low-cost and highly rated investment options: Maryland College Investment Plan, West Virginia Smart Select, or California Scholarshare. If you’re only shopping in your state, look for plans with silver or gold ratings on Morningstar and/or at least four caps from Savingforcollege.com.

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