How Do I Choose the Best 529 Plans?

A.E. Freeman
A.E. Freeman
Two young boys
Two young boys

A 529 plan is a specific type of investment in the United States that is designed to help pay for one's education. The best 529 plans vary depending on where you live in the U.S. and your college savings goals. Usually, you have the option of choosing between a state-sponsored plan or a plan with a private broker. Typically, there are also two types of 529 plans from which to choose — a prepaid tuition plan and a college savings plan. When choosing the best 529 plans, consider how much the plan will earn over time, how much it will cost you and how the money will be invested.

Decide what type of 529 plan will work best for you and the person for whom the college savings will be used. For example, if you know for sure that the money you're saving will pay the tuition at a state-run school, you might consider a prepaid tuition plan to be your best option. When you invest in a prepaid tuition plan, you are buying courses or credits at particular school.

There are limits to the prepaid plan, though, and they might not be the best 529 plans for some people, especially if the student wants to attend an out-of-state school or if you are saving for adult, because most prepaid plans have age limits. The plans also usually don't allow you to save money for room and board, though a few do.

You might prefer a college savings plan, which allows you to save money for any type of school, does not have an age limit and does not require the student to attend an in-state school. The downside of this type of plan is that it lacks the protection that the prepaid plans offer. It also might fluctuate with the stock market.

Other things to consider when looking for the best 529 plans are whether you get a tax break by investing in the plan and the costs of the account. The best 529 plans will allow you to deduct a certain amount of your contribution from your state income taxes. Only a few states will allow you to do this, though. Some states, such as Pennsylvania, will let you deduct the contributions, no matter the state plan in which you decide to invest.

If your state doesn't allow you to deduct 529 contributions, you might as well select a privately brokered plan. When investing in any plan, check the fees first. Ideally, the fees should cost you less than 1 percent. In some cases, the same company will offer multiple plans with different expenses. Unless you get a tax break for choosing the plan with the higher expenses, always pick the option that has the lowest cost.

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    • Two young boys
      Two young boys