By Sabrina Karl
Once you’ve decided to open a 529 account to save for college, the next decision is what state’s plan to choose. That’s because most 529s don’t require residency in their state, and you may be better served by a different state’s plan than your own. So how to choose?
First, take a close look at your state plan. All 529s offer federally tax-free growth and qualified distributions. But some plans offer an additional tax break for residents of that state, taken as a state tax deduction for contributions made. Check if your state’s plan offers such a benefit, and if so, how much.
Second, it’s always wise to check any investment’s fees. Find what’s called the expense ratio, which is published for all investments. Ideally, choose a 529 plan with fees below 0.50%, but at a very minimum stay below 1%. Expense ratios are a useful apples-to-apples comparison, with lower numbers meaning lower fees.
Also note that 529 plans can be direct-sold or set up by a financial advisor, called donor-advised funds. If you’re doing this on your own, look for a direct-sold plan to enjoy lower fees.
Third, the best 529 plans are ones that will earn the most going forward. Of course, no one can predict future returns. But you can research past returns over different time periods for any 529 plan, as well as utilize 529 rating websites.
Fourth, check if the available investment options will suit you. For instance, if you prefer a hands-off approach, age-based funds will auto-adjust your investment as your student approaches college age. But if you prefer more DIY investing, look for more flexibility and options.
In addition, contribution minimums may be important to you. If you plan to make frequent small investments, be sure to choose a plan with low minimums.