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But what are the best 529 plans by state? How does money expert Clark Howard evaluate the best 529 plans? And what exciting new rule makes investing in a 529 plan an even easier decision? Keep reading to find out.
Table of Contents
- What Is a 529 Plan?
- How Do 529 Plans Work?
- 耀竣金融配资_在线配资炒股:Rolling Your 529 Plan Funds Into a Roth IRA
- Important Factors To Consider Before You Invest in a 529 Plan
- Best 529 Plans
- 529 Savings Plans vs. 529 Prepaid Tuition Plans
- Things To Know About 529 Plans
What Is a 529 Plan?
A 529 plan is a tax-free savings plan to help pay for education. Investment gains within these plans are tax-deferred like a 401(k). But withdrawals are tax-free for qualified education expenses. Your 529 funds can be used to pay for post-secondary education, K-12 (up to $10,000 each year) and even apprenticeship programs. However, Clark says the real advantage of 529 plans is longer term, tax-free growth and spending.How Do 529 Plans Work?
Each state has its own rules pertaining to its 529 plan(s). All states limit the total amount you can contribute to a 529 plan. Some states allow the person funding the 529 plan to get a state income tax deduction. You aren’t restricted to investing in your home state’s plan. Only a few state plans include residency requirements.Rolling Your 529 Plan Funds Into a Roth IRA
For a long time, a 529 plan was somewhat of a tax gamble. You’d stash away funds for your child’s college education. But if they didn’t attend college, your choices were sort of lousy.Advertisement
Starting in 2024, the IRS will introduce a third, more attractive choice. You’ll be able to should your child not attend college.
There’s a $35,000 lifetime cap. And annual IRA contribution limits apply. (For 2023, that’s $6,500, plus $1,000 in catch-up contributions for people over 50). But that opens the door for even more lax rollover rules in the future. It also could lead to your child choosing a more frugal option for post-secondary education. If your child took $35,000 at 22 years old and rolled it into a Roth IRA, it would be worth $735,085.81 at 67 years old (assuming a 7% annual return).
“If you don’t know if your kid’s going to go to college, there’s still an enormous tax advantage to doing 529 now because the money can eventually be converted tax-free into a Roth IRA,” Clark says.
“The conversation changed completely because before, if somebody put money in a 529 and it wasn’t used for that, you got killed on taxes.
Important Factors To Consider Before You Invest in a 529 Plan
1. Prioritize Saving for Your Own Retirement First
that parents often struggle with guilt when faced with the choice to save for their own retirement or pay for something for their children, such as education. Clark says that you should always prioritize saving for your retirement first. Contribute to a 529 plan for a child only once you’re on track with your own retirement plan.
2. Stick to Age-Based Options
An age-based portfolio is the 529 plan version of a target date retirement fund, Clark’s most frequent investment recommendation. It’s a true “set it and forget it” investment choice.
These plans adjust your investment portfolio to a more conservative mix as your child gets closer to college age. Your child will be heavily invested in stocks at three years old, for example. The fund manager will automatically adjust the portfolio over time to include fewer stocks and more bonds.3. Invest Only In Direct-Sold 529 Plans
Some states offer both “direct sold” 529 plans and commission-based 529 plans. The latter involves paying fees to a third-party broker in order to buy into a plan. Since direct-sold 529 plans exist, commission-based plans are a great way to waste money.Advertisement
Clark Howard: Here Are the Best 529 Plans in the Country
If you’re the type of person who struggles to pick off of the huge menu at The Cheesecake Factory, purchasing a 529 plan from the sea of options can be confusing. Forty-nine states (and Washington D.C.) sponsor 529 plans. Some of those states have multiple plans. And each plan offers an extensive array of investment options. We’ve gone through every plan and categorized them by tier based on fees and expenses.- Dean’s List: 529 plans with annual fees less than 0.20%
- Honor Roll: 529 plans with annual fees less than 0.40%
- Needs Improvement: Avoid the 529 plans in these states, which charge more than 0.40% in annual expenses
Dean’s List
There are 25 different states with the entire range of passively-managed, age-based options sitting below 0.20% in annual costs. Just 18 months ago, 19 states made the cutoff based on the annual expenses of their 529 plans. That illustrates just how competitive these plans have become.| State | Plan Name | Clark's Investment Choice | State Tax Benefits |
|---|---|---|---|
| Arizona | Age-based index only | ||
| California | "Enrollment Portfolio Passive" only (age-based equivalent) | None | |
| Connecticut | Fidelity Index Portfolio only (age-based) | ||
| Delaware | Fidelity Index Portfolio only (age-based) | ||
| Florida* | Age-based only | None | |
| Georgia | "Enrollment Portfolio" only (age-based equivalent) | ||
| Illinois | Index age-based only | ||
| Iowa | Age-based only | ||
| Kansas | "Equity Index Portfolio" only (age-based) | ||
| Louisiana* | Age-based only | ||
| Massachussetts | Index age-based only | ||
| Michigan | Age-based only | ||
| Minnesota | Age-based only | ||
| Missouri | Age-based only | ||
| Nebraska | Index age-based only | ||
| Nevada | "Target Enrollment Portfolio" only (age-based equivalent) | None | |
| New Hampshire | Index age-based only | None | |
| New Mexico | Age-based only | ||
| New York | Age-based only | ||
| Ohio | Vanguard age-based only | ||
| Rhode Island | Age-based only | ||
| South Carolina* | Age-based only | ||
| Utah | Age-based only | ||
| West Virginia | Age-based only | ||
| Wisconsin | Age-based only |
*Available only to in-state residents.
Honor Roll
Some of these states barely missed the Dean’s List cutoff. These 16 states feature age-based options that cost less than 0.40% in annual costs.Advertisement
| State | Plan Name | Clark's Investment Choice | State Tax Benefits |
|---|---|---|---|
| Alabama | Age-based only | ||
| Colorado | Age-based only | ||
| District of Columbia | Year of College Enrollment Portfolios only (age-based equivalent) | ||
| Idaho | Age-based only | ||
| Indiana | Age-based only | ||
| Maine | iShares age-based only | ||
| New Jersey | Age-based only | ||
| North Carolina | Age-based only | None | |
| Oklahoma | Age-based only | ||
| Oregon | Age-based only | ||
| Pennsylvania | Age-based only | ||
| Tennessee | Age-based only | None | |
| Texas | Age-based index only | None | |
| Vermont | Age-based only | ||
| Virginia | Age-based only | ||
| Washington | Age-based only | None |
Needs Improvement
The 529 plans in these states aren’t worth investing in due to high costs — even if they offer tax deductions.- Alaska*
- Arkansas^
- Hawaii
- Kentucky
- Maryland*#
- Mississippi#
- Montana^
- North Dakota#
- South Dakota
*At least one option features annual costs of less than 0.20%. However, Clark doesn’t recommend anything outside of the age-based options for most people.
^Offers tax deduction for residents on contributions to any 529 plan.
#Offers tax deduction for residents only on in-state 529 plan contributions.
No 529 Plan Offered
There’s only one state that doesn’t currently offer a 529 plan.- Wyoming
529 Savings Plans vs. 529 Prepaid Tuition Plans
There are two types of 529 plans: 529 savings plans and 529 prepaid tuition plans.Savings plans are more commonplace. They typically involve investing in 耀竣金融配资_在线配资炒股:index funds or age-based portfolios (the 529 equivalent of target date funds).
that qualify; for students in kindergarten through 12th grade, there’s a $10,000 annual limit. With post-secondary education, almost every school-related expense is eligible for tax-free withdrawal including tuition, fees, books, supplies, and room and board. Some states and schools offer a different way to fund a child’s education: prepaid tuition plans. The investment options are the same or similar to 529 savings plans. But unlike savings plans, these plans don’t cover expenses like room and board: just tuition at the rate you lock in when you open the plan. You’re essentially paying for tuition by booking it years in advance at a lower cost. But . Before the new rules go into effect in 2024, the IRS will tax any withdrawal you make from a 529 plan that you don’t use for qualified educational expenses. You’ll also get hit with a 10% penalty (with some exceptions).Things To Know About 529 Plans
Here are a few extra tips if you’re planning to set up a 529:Advertisement
- It’s better to open a 529 account in your name rather than in your child’s name. List your child as the beneficiary.
- If your child doesn’t need the money — perhaps they’ll get a scholarship — you can change the beneficiary to . You can also withdraw the money and pay income tax on it plus a 10% penalty. Or, starting in 2024, you can roll the money into a Roth IRA.
- You’re allowed to name only one beneficiary per account. So you may want to open separate 529 plans if you have multiple children. Plus, their ages may be different, which will impact your investing choices.
- It’s critical that you understand the fees, restrictions and tax rules for the specific 529 plan you choose. You can find at least some of that information in each plan’s disclosure. Note that it’s not necessarily called a “disclosure,” and you may have to hunt for it. Start at the bottom of the plan’s website.
- You can’t switch freely between investment options. Usually you’re allowed to switch allocations up to twice per year or when you change the beneficiary.
- 529 plans can impact financial aid eligibility, but the specific impact depends heavily on the circumstances. You’ll need to do your own research into that.
