There is a lot of good information on the internet these days about 529 plans. These tax free college savings accounts are administered by each State and can vary in terms of features, restrictions, incentives, and investments. There are no residency requirements (meaning you can use any state's plan), so how do you know which ones the best for you? Well, first start with your state of residency since there may be some additional benefits offered if you are a resident of the state. Then look at Fees, Investment options, other tax benefits, contribution limits, and the investment manager, just to name a few. Being a Minnesota Financial Advisor, I am more concerned about the best 529 plan for residents of the state of Minnesota. But first some quick important facts on 529 plans in general and why they are such a great college savings tool.
- Tax Savings: All 529 plans provide tax free growth from both Federal and State taxes and some plans even provide state tax deductions.
- Control: The beneficiary (your college bound child) has no control over the money and can't spend it on frivolities.
- Portability: You can change the beneficiary if the first beneficiary does not go to college or does not spend all of the assets.
- Contributions: Anyone can contribute and there are no income limitations which makes this one of the few tax advantaged savings options for high income earners.
- Age: None (in most states) - If you want to go back to school, a 529 plan can accommodate.
In general there are two types of 529 plans, Prepay Tuition Plans and Tax Free Investment Plans. I am not going to look at the Prepaid Tuition Plans because they are simply not as good as the Investment Plan options (we do not bill on clients' 529 plan assets so there is no conflict of interest in me telling you this). With a Prepay Tuition Plan you are betting that you will not be able to achieve a greater rate of return than the rate of inflation. Even with college inflating at a higher than average rate, this should not be hard to do. These plans also have other restrictions that the Investment Plan options do not.
Back to it! What are the best 529 plans for the residents of Minnesota? Well, in my humble opinion, here are the top three starting with the best:
1. Wisconsin - EdVest 529 Plan - The best plan for Minnesota Residents is the Wisconsin plan (as odd as that sounds). Despite how you feel about our state rivalry, you should look at using our neighbor's college savings plan. It really has it all; low-costs, multiple investment options, low minimums, and a good fund manager (TIAA-Cref). You'll find age-based plans, multi-fund portfolios, and individual index funds. The costs average around 0.20% with no additional fees. The minimum to start is only $25 and the maximum you can invest is $330k (remember, don't over fund your college savings!). If you're keeping things simple choose an age-based plan, otherwise build your own portfolio using their many individual index fund options. I would suggest staying away from the active managed funds although being only slightly more expensive makes it tempting. An additional feature of this plan is the Principal Plus Interest fund which is an excellent choice for your bond allocation as your collegiate bound progeny gets closer to freshman year. This fund guarantees your principal and pays an above market interest rate when compared to similar bond funds outside of this type of plan.
2. Nevada - Vanguard 529 Plan - The runner up is Nevada. The reason...Vanguard. By using Vanguard as the investment manager they are able to keep costs extremely low. You are dealing directly with Vanguard, even using their website and forms. You may be able to find slightly less expensive investment options through other state programs (which also use Vanguard investments) but there is some value in simplicity. Things are just easier with Vanguard. Note that this plan has a $3,000 minimum initial investment for out of state residents. Other features of the plan include popular age-based funds and low-cost stand-alone US and International Stock Fund options. The one type of fund lacking from this plan that keeps it from being my first choice is a Guaranteed Principal or Fixed Account option (like the Principal Plus Interest fund listed above). This means your bond exposure will have interest rate risk especially if you are being more aggressive with your allocation (like the High-Yield Bond Portfolio). Also, be aware Nevada sponsors multiple 529 plans (SSgA, USAA, and Putnam) so make sure you choose the Vanguard managed account. Full disclosure, we use many or Vanguard's funds in our clients' portfolios including my own.
3. Utah Educational Savings Plan - This was a close competition between Utah, New York, and Ohio, which all have low fees. I like Utah specifically because it offers both Vanguard and DFA (Dimensional Fund Advisors) funds with both age based and static investment options. In addition, there is no minimum initial investment (unlike Nevada) and no ongoing contribution requirements. They also have a "Set-it-and-Forget-It" type of strategy where the investments automatically adjust based on the beneficiaries age. While I don't endorse this type of strategy, I know some people are looking for the easiest way to invest. On the downside they charge a completely unnecessary annual maintenance fee of $12/year. Utah is still a solid choice if you want access to Dimensional Funds investment philosophy and still keep costs low.
Keep in mind as a rule of thumb you should under-fund not over-fund your 529 savings. College can always be paid for without funds from a 529 plan however, funds from a 529 plan cannot fund anything besides college and will be hit with taxes and a 10% penalty if used for anything else. You don't want to be stuck with a lot of extra 529 plan assets and no education to spend it on.
If you are looking for more information start with CollegeSavings.org for info on all state plans as well as a handy comparison tool and links to all the official 529 plan websites. Otherwise, feel free to reach out to us for more specific questions about 529 plans and saving for college.
NOTE: This article was last updated 05/12/2015. Minnesota has changed their plan so if you read this article earlier, the Minnesota 529 Plan has dropped off the list. Without any tax benefits it makes sense for would be 529 investors to shop around. The costs are relatively low so if you already have the plan it probably makes sense to keep it. Sorry MN but maybe it's time to improve your plan for MN Residents.