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529 Plans: How Do you Choose?

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[Happy May 29th... or 5/29... or 529 Day! Get it? I originally wrote this article in 2007 after days of reading about to best gift money for my nephew's college. Eight years later, the specifics of the plans may have changed, but the overall lessons and logic remain the same. This is exactly how it was published in 2007, mistakes and all.]

I mentioned yesterday that I'm looking to give my newborn nephew a head start in his education savings. Having gone through a number of options, I decided that a 529 Plan was my best option. Unfortunately, a lot of research may be necessary to decide on the right state's 529 Plan for you. Here are the steps I took to determine which state will receive my money. Remember that I'm looking to give $500 initially and $100 a year after that.

Check your own state first
My home state is California. I thought it would be very easy to see if there was a tax benefit for my state. However, states don't often advertise that your invest is NOT tax-deductible. They are in the business of getting you to invest with them, so it doesn't serve their cause to advertise a fact that could be construed as a negative. When the originating source isn't helpful, I suggest looking for a third party. Kiplinger.com came to the rescue with a list of states that offer a 529 Plan tax deduction. It's not the most recent list, but the best I could find. If your state is on that list, chances are your best option is to invest in your own state's 529 Plan and take the tax deduction. The exception is if your own state has a significant reason to reject them, such as the ones below. If your state, like mine, isn't on that list, there's no particular advantage that I could find for going with that state. In fact, you may be better off looking at another state's for a variety of reasons that we will cover now.

How is a state's 529 Plan sold?
There are two basic ways to invest in a 529 Plan. The plans are sold directly or through an advisor. Some states may offer either one or both options. The direct sales is the do-it-yourself method and the advisor option is for people that wish to have a little more guidance. If you've been reading my writing for any length of time, you know that I'm a direct kind of guy. I hate paying fees when I can do the research myself, so I eliminated any plans that didn't have a direct sales option.

How do I know if a state's plan is any good?
Put simply, this is the biggest question for those that are looking outside their own state. With 50 states and some having multiple plans, you could spend a week reading about each of them. I typically find this stuff fun, but it has it's limits. I spent a lot of time researching various articles that listed 4 or 5 good states, but none of them gave me anything to compare or went into detail on why they are good. I finally stumbled upon Saving for College's 5 Cap Rating System. With their list you can pretty quickly scan through and weed out quite a few sub-par states. In my research, I only looked at plans that had 4.5 Caps for the out-of-state and had a direct sale option. This left me with just a handful to consider. I still needed to narrow it down which required me to reject some plans.

Reasons to Reject a state's plan:

  • Minimum Investment
    Since I intend to invest only $500, any plans that required more than that had to be excluded. I came across a few that were $1000 to start and some that seemed to require automatic deposits of $25 a month. After eliminating those I was left with about 4 or 5 different options.
  • Maintenance Fees
    Some states charge $25 a year if you don't have $25,000 in assets with them. We are expecting to contribute $100 a year in addition to our initial deposit. Those maintenance fees would be 25% of each year's investment. This eliminated Utah for me despite the fact that it's one of the best state plans according to most reviews.
  • Expenses
    Like mutual funds, 529 Plans have expenses. Like you and me, the financial folks have to make their living. There are numerous reports on how index funds often outperform the managed funds, so I prefer to go with them. They typically have very low expenses since they aren't out visiting companies to research their investments. So I looked at the expenses of the remaining choices. I was happy to stumble upon two states with expenses as low as 0.30% that matched all the above criteria.
  • Investment Options
    I might be getting a little picky here as most plans offer the basics - age-based plans, equity plans, balanced plans, etc... However, a few plans go above and beyond and offer more choice. Other plans offer fund families you might already know and trust.

The Winner
Ohio passed all the tests with flying colors. I don't have the beneficiaries social security number, so I haven't signed up yet. Maybe during the final review there will be some kind of gotcha, but right now all systems are go. They seem to have put together a best of breed program. There are no fees, no significant minimums (just $15 per investment option). Their expenses are amongst the lowest I found (except for you lucky folks who live in Louisiana) as long as you go with their Vanguard option. I've read that you can mix and match a few different Vanguard funds, which, if true, is going to be icing on the cake. If it's not true, then I'll go with the Aggressive Growth option as it's 85% Vanguard Total Stock Market Index and 15% Vanguard Institutional Developed Markets Index Fund. I love the way that Vanguard has handled my ETF portfolio, so I'm excited to give them a little more money to work with.

The Runner-up
Michigan almost had it all - it really was a photo-finish. The only differences I could find were in the investment options. TIAA-CREF is a great organization, but I don't know them like I do Vanguard. They also had only three static investment options and it didn't seem like you could build a portfolio from them at all. Though their all equity option was tempting, I'm passing Michigan for more choice.

Have you invested out-of-state 529 Plan? If so, I'd love to read in the comments what factors influenced your decision.

Posted on May 29, 2015.

This post deals with: ... and focuses on:

College

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19 Responses to “529 Plans: How Do you Choose?”

  1. MossySF says:

    I also chose the OH plan. UTs plan has lower expenses for fixed income but higher for equities – especially for non-UT residents who get an extra fee tacked on.

    IL just updated their plan with pretty competitive fees (0.20%-0.23%) but only offers static or age-based portfolios. There is no way to pick your own ratio of domestic large, domestic small, international, bonds.

    NE has pretty high fees (0.60% in addition to the fund fees) but allows full access to underlying Vanguard funds for the slicer & dicer.

    The only other plan I would consider would be WV’s plan to get access to DFA funds.

  2. Vicki says:

    Fabulous post!

  3. Ted Valentine says:

    I opened a 529 for my baby born this year. I also chose the Ohio 529 due to low fees with several nice Vanguard index options. I signed up online and funded it through an EFT with ING. You should not hit any snags. It was almost too easy.

  4. Christi says:

    How well does Virginia stand up? My husband and I were considering doing that for our daughter.

  5. Mark says:

    Great post. It looks like OH is the cheapest until you are over $10,000 in account balance, and then it is IL.

  6. […] choosing a 529 plan @ lazy man and money, with at least one from each state, which should you go for? […]

  7. […] Man and Money has a great article on choosing a 529 plan that I recommend reading if you are looking for more information on selecting the plan that’s […]

  8. […] Choosing a 529 Plan @ Lazy Man and Money […]

  9. […] on my mind since she was born, but I kept delaying it with no good excuses. If I didn’t read Lazy Man’s post on 529 plan over the weekend, the delay could be even longer. When our first daughter was born in 2005, I […]

  10. […] Man at Lazy Man and Money goes through the process of selecting a 529 plan . Always check your own state’s plan first to see if you get any tax benefit, but […]

  11. Andy says:

    Very informative. Actually been looking into a 529 plan for my son and the state plans seem to offer a better deal, espically since the college plans (tied to the market) are losing value!

  12. JS says:

    It appears that Utah is now waiving the service fee if you agree to have your statements delivered electronically.

  13. […] Five Cent Nickel is looking for the very best 529 Plans. I'd like to direct him to the article that I wrote this week, Choosing a 529 Plan. […]

  14. Marc says:

    Since you have interest in college savings/529 Plans I found this today. A free download of the electronic copy of Savingforcollege.com’s Guide to College Savings, written by Joseph Hurley.
    http://www.savingforcollege.com/529-day/

    Per the site it is written for the individual investor, this 86-page guide explores the planning and savings options available to families that are saving for a child’s college education.

  15. […] the deductible amounts vary by state. If your state’s plan does not offer a tax deduction, LazyManAndMoney cautions you to be aware that there’s no particular advantage for using your state’s plan. […]

  16. […] the end). I got in reminder about all this from CollegeAdvantage, the place I determined had the best 529 plan for my niece and nephew. Specifically their newsletter had this image on the right (click for a larger view). The part that […]

  17. […] few years back, I wrote a short guide to 529 Plans as I put some money away for my niece and newphew's college savings. The plan I chose was Ohio's […]

  18. […] I didn't want to gift the money have it be blown on Transformers and bubble gum. I wanted to give them money towards and education. This meant looking into various vehicles such as UGMA & UTMA Custodial Accounts for Minors, Coverdell ESAs, and 529 Plans. I concluded that the 529 Plan was the best fit. Then it was simply a challenge to choose the right 529 plan. […]

  19. […] in using 529 plans to save for college for years. Many years ago, I wrote an extensive article on how to choose a 529 plan. My reasons for investing in them were the small state tax savings and […]

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