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Before I tell you the best 529 college savings plans, a caution: Never trust any article that purports to tell you what the best college-savings plan is for you.
Such a feat is impossible. There are too many variables involved in assessing these state-run, tax-deferred vehicles, including:
- Where you live, and whether that state offers tax breaks and other incentives for its plan
- The age of your child
- Your risk tolerance
Even if you could identify the one perfect 529 plan for your needs, you can't guarantee its management won't change or its performance won't slip before your child graduates.
Furthermore, some options that are essential for one investor would be irrelevant for another. An active investor might want a plan that offers a number of different investment options so she can tailor the portfolio, for instance, while a busier parent might be happy to turn the asset allocation decisions over to the pros by using an age-weighted option (where the exposure to stocks is reduced as the child nears college age).
Still the best savings tool
The 529 college savings plan, if you need a primer, allows you to put aside money for a future education. The money grows tax-deferred and, at least under current law, is tax-free when withdrawn if used to pay qualified education expenses. Contributors (usually the parents) retain control of the accounts, which also receive favorable treatment in financial-aid calculations.Some 529 plans have gotten a bad rap lately for poor performance and high expenses, but that shouldn't taint the whole crowd. For many families they are, as 529-guru and CPA Joseph Hurley puts it, the best way to save for college. (For more information on college savings options, see "College plans for the rich, poor and in-between.")
When choosing a 529 plan, you should keep the following in mind:
There may be no place like home. Many state plans offer their residents tax deductions for 529 contributions, which can be a powerful incentive. If the investment options are decent and the costs low, you might as well stay put. But don't let state chauvinism or a tax break blind you to the long-term disadvantages of a high-cost, poorly performing plan.
Commissions clobber returns. You theoretically can make a case for paying commissions on other investments if an adviser is a whiz at stock picking, say, or offers comprehensive financial planning services. With 529 plans, though, the plan managers, rather than your advisor, make most of the important decisions. Often a commission expense isn't justified, and you probably won't get returns that will offset the extra cost.
Low cost plans are best for the long run. The best plans keep their total annual costs around 1%. The lower the fees, the more returns you get to keep. State plans that are run by Vanguard, T. Rowe Price and TIAA-CREF tend to be the cheapest while also offering decent performance.
The following five plans have kept costs under control while turning in better-than-average performance in the past few years.
The growth in 529 plans has been relatively recent, so I compared one-year and three-year returns for various portfolios. The figures included here are for the plan portfolio that's allocated approximately 80% stocks; in age-weighted plans, that's typically the allocation for beneficiaries who are 7 to 9 years old.
The performance figures are for the period ended June 30, 2005. Most are from Hurley's indispensable Web site, SavingForCollege.com, except for the Virginia figures, which were provided by that state.
And the winners are …
State: Alaska- Plan: The University of Alaska College Savings Plan and its nationally-branded twin, the T. Rowe Price College Savings Plan
- Open to: All
- State tax break for residents: None
- Manager: T. Rowe Price
- Performance of 80% equity portfolio: 7.85% 1-year, 8.84% 3-year
- Costs: $30 annual fee waived for automatic contributions and accounts over $75,000
- Expenses: 0.3% annual asset management fee, plus annual expenses for underlying investments of 0.49% to 0.73%
- Comments: Solid performance and relatively low fees make this plan a winner for most investors, regardless of what school is attended. But a tuition-value guarantee offered future University of Alaska students makes it a slam dunk for many residents.
State: Nebraska
- Plan: College Savings Plan of Nebraska
- Open to: All
- State tax break for residents: Up to $1,000 of contributions may be deductible
- Manager: Union Bank and Trust
- Performance of 80% equity portfolio: 8.32% 1-year, 9% 3-year
- Costs: $20 annual fee
- Expenses: 0.6% annual asset management fee, plus annual expenses for underlying investments of 0.09% to .4% for age-weighted portfolios, 0.05% to 1.01% for other portfolios
- Comments: This low-cost plan has risen to the top of many "Best 529 Plans" lists; Morningstar praised it last year for its wealth of good investment options. A bonus: Although plan participants can use their accounts anywhere, those who attend a Nebraska college can receive matching contributions from a private endowment fund.
State: Nevada
- Plan: The Vanguard 529 Savings Plan
- Open to: All
- State tax break for residents: None
- Manager: UPromise Investments
- Performance of 80% equity portfolio: 7.86% 1-year, 3-year not available
- Costs: $20 annual fee on accounts below $3,000
- Expenses: Annual asset management fee included in the expenses for underlying investments of 0.6% to 0.81%
- Comments: Another Morningstar favorite, this plan is run by UPromise but uses thrifty Vanguard funds. Twenty different investment options give contributors plenty of choices.
State: Rhode Island
- Plan: CollegeBoundfund, Alternative R
- Open to: Residents only
- State tax break for residents: Up to $1,000 of contributions may be deductible; the state also offers a 2-for-1 match of contributions up to $1,000 made for those who open an account before the beneficiary turns 11.
- Manager: Alliance Capital Management
- Performance of 80% equity portfolio: 9.95% 1-year, 9.95% 3-year
- Costs: No annual or account maintenance fees
- Expenses: 0.72% to 0.94%
- Comments: It's a pity more of us don't live in Rhode Island -- or that the state doesn't open up this plan to nonresidents. Even without the tax incentives, this is a good plan; if you live there, it's a mystery why you'd invest anywhere else.
State: Virginia
- Plan: Education Savings Trust
- Open to: All
- State tax break for residents: Up to $2,000 of contributions may be deductible; deduction unlimited for contributors 70 and older
- Manager: Virginia College Savings Plan Board
- Performance of 80% equity portfolio: 9.1% 1-year, 9.56% 3-year
- Costs: $25 one-time application fee, no annual maintenance fee
- Expenses: .25% annual asset management fee, plus annual expenses for underlying investments of 0.08% to 0.31%
- Comments: This plan recently slashed expenses by about half and added Vanguard options, which makes a good thing even better. A generous tax break for residents is icing on the cake.
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
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