Top 3 Considerations When Selecting a 529 Plan

November 13, 2017 12:04 pm
Chrissy

Christine H. Canapari, ChFC®

Senior Financial Advisor & Manager of Client Services

If you are saving for college for your children, a 529 college savings plan is one of the best vehicles to utilize.  A 529 plan is a tax-deferred account that allows you to save money and invest it for future college expenses.  As long as you use the funds for qualified college expenses, withdrawals from the account are tax free.  Within the account, you select investments that will hopefully grow in value over time to help chip away at those college tuition bills.  Plans are offered by each US state, but you are not required to use the plan from the state you reside in.  So how do you pick a plan to invest in?  While there are many considerations, I recommend focusing on these three aspects to get you started.

Fees
As you would with your own savings plans and investments, you’ll want to consider the fees that will be charged within the account.  There are two types of 529 plans – direct sold programs and broker sold programs.  A direct sold plan has no sales charges, while a broker sold plan will have expenses or a sales charge associated with it which will compensate the advisor who sells it to you.  Other fees will include program management fees and the fees of the underlying investments.  Some states, like Rhode Island, will waive program management fees for Rhode Island residents using the plan.  The underlying investment fees will be similar to those charged in a mutual fund and should also be compared for cost effectiveness.  There are plenty of 529 plans that offer inexpensive investment options.  Direct sold plans offer significant savings in many cases.

Tax Deduction
As I previously noted, you are not required to use the 529 plan that your resident state offers.  However, there may be a very good reason to do so and that is a state tax deduction.  There is no federal income tax deduction for 529 contributions, but some states offer one.  Rhode Island, for example, offers a $500 maximum income tax deduction per year for contributions into a 529 plan for single filers and $1000 max deduction for joint filers.  For a state like Tennessee, which has no state income tax, there is no state deduction.  Connecticut offers a substantial income tax deduction of up to $10,000 per year for a married couple filing jointly.  As you can see, state income tax benefits can vary widely and should be investigated thoroughly.

Investment Performance
The final item to take into consideration is the performance of the investment options of the plan.  Most plans will offer asset allocation options that include investments in equities, fixed income and cash.  The performance of the plan’s investment options can be found on its website.  While past performance does not indicate future results, it should not be completely dismissed.  You may also visit savingforcollege.com, an extremely helpful site that offers a wealth of information about 529 plans including annual plan rankings.

In your search for the right 529 plan, there are many factors to consider.  You should always include your own state’s plan in your search as it may offer its residents greater cost savings or state income tax benefits.  After choosing the plan that’s right for you, be sure to review it on an annual basis to be sure your college savings is in good hands.

Chrissy Canapari, ChFC® serves as Senior Financial Advisor and Manager of Client Services at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail her at ccanapari@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Chrissy’s opinions and comments expressed on this site are her own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.