How to Choose the Right 529 Plan
Choosing the right 529 plan can feel like trying to pick out the perfect apple on a tree of apples. For the most part, they look the same and offer the same benefits. So what is the difference between 529 plans and what makes one better or different than the next one?
There are some important steps to follow that can significantly help you navigate the world of 529 plans and choose the one that is right for you.
1. Check Out Your State’s Plan
Chances are that your own state will have a plan that encourages you to keep your money in your home state. Be sure to look into the tax incentives your state may be offering through their 529 plan options. Additionally, be sure to see if your state plan offers an income tax deduction or tax credit on contributions.
You’ll then want to calculate any fees and compare them with out of state plan fees so that you can determine the most cost-effective 529 plan.
2. Decide Between Investment Plan vs. Prepaid Plan vs. Independent 529
Once you’ve decided which state to invest in, you can choose between an investment plan or a prepaid plan. A prepaid plan allows you to pay for the cost of in-state college tuition ahead of time. An independent 529 is a prepaid plan that allows you to pay for private college tuition ahead of time.
An investment plan, on the other hand, allows you to invest in mutual funds the same way you would with your retirement accounts, like a 401k, IRA or TSP. The value of your investment fluctuates based on the performance of the funds you choose. They tend to be a better choice and can offer potentially higher rates of return. If your children are very young and you have time to invest over the long-term, investment plans make a lot of sense.
3. Create Your Investment Plan
If you go with a prepaid plan or independent 529, you wind up paying tuition in advance. A prepaid plan is managed by the state treasury and an independent 529 is handled directly by the private institution.
With an investment plan, you will have a little more options and can choose how to allocate your funds between stocks and bonds. A financial advisor will be a great resource to you with an investment plan and can help you build a plan according to your goals. A financial advisor may suggest target matriculation date funds. These are based on the date your child will start college and become increasingly conservative as that date approaches. Similar to a target date retirement fund that takes on more risk when you’re young, but becomes more conservative as you approach retirement.
With the right 529 plan and enough time, your college savings investment can pay for itself. Reference the steps outlines above and start making a decision about the right 529 plan for your growing family. They will be headed off to college before you know it.
Chris Hardy, CFP®, EA, ChFC®, CLU®, NTPI Fellow® is the Director of Planning and Investments at Paramount Investment Advisors, Inc., a fee-only wealth management firm located in the metro Atlanta suburb of Suwanee, Georgia. Chris specializes in providing clarity to his client’s financial vision through comprehensive and strategic wealth planning.
Chris and I became friends through NAPFA and I asked him to write some thoughts on “How to Choose the Right 529 Plan” as a guest topic for this site.