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Rating the State Section 529 Plans

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This section of the site provides advice about choosing a section 529 plan and identifies the best state section 529 college savings plans.

Choosing a Plan

The most important factors affecting return on investment are the amount of time invested, the family's tax bracket, the amount of any fees and sales charges, the amount invested, and the availability of state income tax deductions for contributions. Even a 0.5% difference in fees can have a big impact. Accordingly, the most important differences among section 529 plans are:

  • State Tax Benefits. Your state may offer special tax benefits for the state's own plan, such as allowing all or part of your contributions to the plan to be deducted on your state income tax. Some states provide these tax benefits for investments in any state 529 plan.
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  • Investment Options. Each state's plan offers different investment options, both in the style of the investment (age-based, risk-based, guaranteed, principal protection, managed funds, indexed funds) and in the actual investment performance. About two-thirds of families are invested in age-based asset allocation schemes within their 529 plans.

  • Costs. Some plans, such as those managed by Fidelity, Vanguard and TIAA-CREF, have very low fees. Others charge very high fees that will eat into your investment returns and may outweigh the tax benefits. It is important to evaluate all of the fees associated with the plan, including administrative fees, management fees, fund loads, front-end sales charges and back-end sales charges. Some plans charge excessively high sales loads of as much as 5% or 6% and management fees of as much as 2% a year. Focus on direct-sold plans, as they have lower fees than the adviser-sold plans.

The tradeoff between lower fees and a state income tax deduction for your contributions depends on the length of the investment horizon. If you are investing for a young child, having lower fees matters more. If you are investing for a high school student, the state income tax deduction may yield a greater financial benefit.

Generally speaking, you should evaluate your own state's plan as well as the plans of at least two or three other state's plans before choosing the plan that is best for you. FinAid has rated the plans according to a set of objective criteria, such as having costs below a given threshold and investment performance. You may find this information helpful in identifying other state's plans worth considering.

Rating the Plans

Since some states differentiate between residents and non-residents, we evaluate the plans twice, once for residents and once for non-residents. Our ratings are based on the following criteria:

  • State tax incentives, such as state tax deductions for contributions and tax-free withdrawals for qualified expenses.
  • Affordability, such as a minimum investment of no more than $500 during the first year.
  • Good selection of investment options. Does the plan include sufficient age-based, risk-based and principal protection options? Are indexed funds available, or just managed funds? An extra bonus is given for plans that include a guaranteed return fund.
  • Relative investment performance.
  • Flexibility. A lack of any unusual restrictions, such as severe penalties for early withdrawal.
  • Low costs, including both low annual costs (management fees, administrative fees, and fund loads) and low sales charges. Some funds charged sales charges or back-end loads of as much as 5.75%, which is excessive. High costs can eat into investment gains.

The Best Section 529 College Savings Plans

The best section 529 college savings plans for the state's residents are, in no particular order:

  • All of the TIAA-CREF plans: Kentucky, Idaho, Mississippi, Oklahoma, Tennessee, Vermont, California, Connecticut, Georgia, Michigan, Minnesota, Missouri, New York.
  • Pennsylvania
  • South Dakota
  • Texas
  • Virginia
  • Iowa
  • New Jersey
  • Arkansas
  • Florida
  • Hawaii
  • Utah
  • Louisiana
  • Ohio
  • Illinois
  • Nebraska
  • Maryland

The New York, Minnesota, Missouri and Michigan plans are particularly outstanding for state residents. Pennsylvania is noteworthy for being the first state to allow state income tax deductions for contributions to any state's college savings plan, not just Pennsylvania's.

The following state plans are worth considering because of the state income tax benefits for residents, but are not otherwise noteworthy: West Virginia, South Carolina and New Mexico.

If you live in one of the states listed above, you should first consider your state's plan because of the low costs and state income tax benefits. You should also consider the plans that are listed below as being among the best for non-residents.

If you don't live in one of the states listed above, you should compare your state's plan with one of the plans listed below, since they are likely to be better than your state's plan.

The best section 529 college savings plans for non-residents are, in no particular order:

  • All of the TIAA-CREF plans except Kentucky (which is not open to non-residents): Idaho, Mississippi, Oklahoma, Tennessee, Vermont, California, Connecticut, Georgia, Michigan, Minnesota, Missouri, New York.
  • Pennsylvania
  • Iowa
  • Hawaii
  • Illinois
  • Utah
  • Nebraska
  • College Savings Bank

Basis for the Ratings

The following information formed the basis for these ratings.

  • Low fees: 23 states had fees of 1% per year or less for both residents and non-residents. All of the TIAA-CREF and Vanguard plans were in this group. These states included Alaska, Carlifornia, Connecticut, Georgia, Hawaii, Idaho, Illinois, Iowa, Kentucky, Louisiana, Maryland, Michigan, Minnesota, Mississippi, Missouri, New Jersey, New York, Oklahoma, Pennsylvania, Tennessee, Texas, Utah, Vermont, and Virginia. Nebraska, Massachusetts, New Hampshire, and Delaware were borderline.
  • High initial investment: The following states were downgraded for a high initial investment for residents or non-residents: Arkansas, Massachusetts, Nevada, New Hampshire, Rhode Island, and Wyoming. The minimum investment was seen as being high enough to act as a barrier to entry for low income families.
  • Guaranteed return: The following states were upgraded for offering a guaranteed portfolio. This includes several of the TIAA-CREF plans, which offered a hedge against inflation plus a minimum 3% fixed rate of return, and the College Savings Bank CollegeSure CD, which is indexed to private college tuition changes. The states included Alaska, California, Connecticut, Georgia, Michigan, Minnesota, Missouri, New York, Ohio, and Pennsylvania.
  • Impact on state aid: The following states specified that money in the state plan does not affect eligibility for state grants: Illinois, Indiana, Kentucky, New York, Pennsylvania, and Virginia.
  • The following states do not exempt qualified withdrawals from other state plans from the state's income tax: Alabama, Alaska, Arkansas, Illinois, Mississippi, Nevada, New Hampshire, North Carolina, South Dakota, Tennessee, Wisconsin, and Wyoming.
  • The following states do not exempt qualified withdrawals from the state's own plan from the state's income tax. These states only provide a tax deferral. Alabama.
  • The following state plans are closed to non-residents: Kentucky, Louisiana, New Jersey, and North Carolina.
  • The following state plans are open to non-residents, but only through brokers and advisers or with higher fees: Alabama, Arkansas, Maine, North Carolina, Ohio, Rhode Island, South Carolina, South Dakota, Texas, and West Virginia.
  • About a dozen states provide special state benefits, such as matching contributions for low-income families or birthday present grants.
  • State tax deduction for contributions:
    • The following states offer a full tax deduction for contributions to the state's plan: Colorado, Illinois, New Mexico, South Carolina, and West Virginia.
    • The following states have no state income tax, effectively offering a full tax deduction for contributions to any state's plan: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
    • The following states offer a modest tax deduction of at least $4,000 per taxpayer for contributions to the state's plan: Idaho, Michigan, Mississippi, Missouri, Pennsylvania and New York.
  • Restrictions: The following states included early redemption penalties or age limits in their plans: College Savings Bank, New York, Iowa, and Virginia.

Other Ratings of 529 College Savings Plans

Other sites who have rated section 529 plans include:

 

 
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