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Kiplinger’s Best 529 College Savings Plans

This article was written by in Investing. 11 comments.


Although I do not have children, I am considering starting to save for college. With the cost of tuition rising well above levels of inflation, the sooner I get started, even before any children exist, the higher the chance my child or children will be able to go to school without an insurmountable pile of debt. Unfortunately, most college savings plans are complicated. They are tax efficient, but only if some conditions are met. If you need to withdraw money from the funds for purposes other than education, you can face penalties. There are a number of variables to consider, least of all is the idea that I may not have children at all.

Kiplinger’s Personal Finance has named its top five 529 college-savings plans to help parents or possible future parents like me decide which options to pursue. None of these options sound perfect, however. I do not like the sound of any of these top five, either due to flexibility or fees. In addition to fees by the dollar, all plans charge a management expense, fees as a percentage of assets, in addition to the underlying funds’ management expense.

Illinois Bright Start College Savings Program. Pros: Low fees. Cons: Low fees only apply to actively-managed funds (poor performers). If you choose Vanguard funds you must pay $10 per fund.

Alaska’s T. Rowe Price College Savings Plan. Pros: Good investment options. Cons: $25 yearly fee for some accounts.

Michigan Education Savings Program. Pros: Plan includes a guaranteed return option. Cons: The plan is run by TIAA-Cref.

College Savings Plan of Nebraska. Pros: Investors can choose from a wide variety of mutual funds. Cons: Every account has a $20 annual maintenance fee.

Virginia CollegeAmerica. Pros: Kiplinger’s counts the fact that this plan is sold by financial advisers as a pro. Cons: The plan includes only funds from American Funds, which are expensive and underperform.

Kiplinger’s also includes a state-by-state guide to 529 plans. Use this guide to determine whether your state offers its own plan with tax benefits. The benefits may compensate for the other drawbacks of the plan. I live in New Jersey, which does not offer any 529 plans with tax benefits, but I could invest with another state’s plan. While I live in New Jersey, I would not be able to benefit in the other state’s tax advantages.

Best 529 College-Savings Plans, Thomas M. Anderson, Kiplinger’s Personal Finance, June 26, 2009

Published or updated June 30, 2009. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 11 comments… read them below or add one }

avatar HOBtrvlr

Not exactly true about not being able to take advantage of other states’ tax benefits. I also live in NJ–but I work in NY. The NY plan allows for an up-to-$10k tax deduction for *anyone* who pays taxes in the state. So, even though I live in NJ, I have invested in the NY plan (run by Vanguard, with good options and low fees!), and will be able to deduct any contributions I make on my NY tax return.

Incidentally, I’ve read that the NJ plan is one of the worst out there. As you mentioned, it does not have any front-end tax benefits, and I believe it is an “advisor” plan, which has much higher fees associated with it.

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avatar Luke Landes ♦127,505 (Platinum)

Excellent point. I did not consider those who live in one state and work in another, complicating their state income tax.

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avatar Pel

Hi,

I am getting all confusing information on NY 529 plan tax benefit. Confusion is on the residency status. can you confirm if you are able to deduct contribution on NY state tax although living in NJ ?

This is what the NY savings plan site says:

” If you are a resident or taxpayer of another state, you should consider whether that state offers a 529 plan with tax advantages or other benefits that are not available through this Program. “

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avatar HOBtrvlr

@Pel: I called them and confirmed that this was indeed the case before investing. If you live in NJ, but work in NY, you file/pay taxes to NY state, and can take the up to $10k as a deduction.

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avatar Pel

HOBtrvlr,

Thanks for the reply. Just curious as to why they would not add this info to their FAQs. I called them like 6 months ago to clarify and they said, cannot be sure talk to your tax professional. Yours is the only confirmation I am getting on the net, every other post / article is kind of not addressing it directly.

Guess another headache would be how NJ treat that tax credit and may ask for tax on the same.

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avatar HOBtrvlr

So, yes, they did say that I should consult a tax professional. As you mentioned, it would depend on your tax rates in NY/NJ, etc. I certainly am not a tax professional, but decided it was worth it for (a) getting the $10k NYS deduction (regardless of any NJ benefit/detriment), and (b) investing in a significantly more solid plan than the NY plan.

avatar MyJourney

With a kid hopefully on its way – I have been thinking about this for a while. Once I am past the point on no return (get an ok from the doc that all is well) I plan on opening a NY 529 (NY Resident here).
The tax benefits for your NY Tax Paying Readers:

https://uii.nysaves.s.upromise.com/content/taxbenefits.html

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avatar James

I have two accounts using VEST. They have very low fees and have no issues setting up ACH withdraws. All of the options are age based and will change automatically given the age of your child. So far I have gotten a 10% return since I started about 6 months or so ago.

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avatar Ari

You can start a 529 at any time – even for yourself. You can change the beneficiary once a year and some planners think about this as another opportunity for tax-free savings. The money can be used for any qualified educational expense.

Also, I wouldn’t be so quick to knock American Funds – they run a pretty good shop with a good performance record for many of their funds.

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avatar Greg

What’s the matter with Michigan’s TIAA-CREF managed plan? I thought they were
one of the lowest cost operators around…..

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avatar Luke Landes ♦127,505 (Platinum)

TIAA-Cref is lower cost than a lot of companies out there, but there have been many reports of investors having significant trouble with customer service, with some unrecovered mistakes by the company costing investors more than any management fee would have. I’ve had some small problems with TIAA-Cref in comparison, but I’ve written about the issues here over the past several years and even years later visitors stop by Consumerism Commentary to share their stories of misery. I still have some money invested there because I haven’t been motivated enough to move it out, but I don’t plan on sending any new money to TIAA-Cref.

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