Question: I started a 529 College Savings Plan for my son soon after he was born. Now I wonder if I chose the best plan. What are the best and the worst plans?
Answer: Morningstar, a Chicago-based investment research company, reviews 529 plans annually. In their report published last month, the analysts picked 33 plans out of 84 available nationwide as best-in-class. They then further gave each of those plans a Gold, Silver, or Bronze rating. The analysts considered each plan’s underlying investments, manager selection process, asset-allocation approach, investment options, fees, and oversight. Three plans earned Morningstar’s top Gold rating: Nevada’s Vanguard 529 College Savings Plan, Utah’s Educational Savings Plan, and the Virginia529 inVEST Plan. Silver ratings went to: Maryland’s T. Rowe Price College Investment Plan, Alaska’s T. Rowe Price College Savings Plan, the MOST Missouri 529 Plan, Illinois’s Bright Directions Plan, Ohio’s CollegeAdvantage Plan, Virginia’s CollegeAmerica Plan, Michigan’s TIAA Tuition Education Savings Program, New York’s 529 Program (Direct), California’s Scholarshare College Savings Plan, and Rhode Island’s CollegeBound Saver (Direct). The 2015 Morningstar gave three plans a negative rating:South Dakota’s Allianz CollegeAccess 529, Arizona’s Ivy Funds InvestEd 529 Plan, and West Virginia’s Hartford SMART 529 Plan.
Question: My research tells me that 529 plans are available from all 50 states and the District of Columbia. Can I get a deduction on my income tax return for contributions?
Answer: Every state’s 529 Plan grows tax-deferred and allows tax-free qualified distributions. Some states allow the account owner or contributor a tax deduction on contributions. California does not, so California residents have no income tax incentive to use California’s 529 Plan.
Question: How do I choose investments in a 529 Plan?
Answer: You want your contributions in a 529 Plan to grow and compound, so you want a plan with good investment options. The selection process can be a daunting task. Some state plans let you pick and choose your investments and others offer “canned” options. I will use Virginia and California plans as examples, because they offer the two extremes. In Virginia you need a financial advisor to invest in the CollegeAmerica 529 plan, which allows you to select from a large number of mutual funds within the American Funds group, including some target-date funds and multi-fund portfolio funds. With the help of your investment advisor you can build a well-rounded, diversified portfolio that suits your investment objectives, time horizon, and risk tolerance. On the other hand, you can enroll directly in California’s Scholarshare College Saving Plan and do it yourself. TIAA Tuition currently manages California’s plans. They offer age-based, multi-fund, and single-fund portfolio strategies that allow you to build a custom strategy. Scholarshare offers both actively managed funds and passively managed index funds.
Question: What are the fees?
Answer: Fees vary by plan. The trend is toward lower fees, and some of the more expensive plans are now shut down.
Question: How do I research fees and other features of 529 Plans?
Answer: Use the Internet. Start with the IRS website. Read their recently updated “529 Plans: Questions and Answers.” Next, read the SEC’s publication “An Introduction to 529 Plans.” Then use SavingForCollege.com and Morningstar.com websites to research available investments, fees, and other
Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment advisor and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning. Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA93940 or email them to firstname.lastname@example.org.