Choosing a 529 Plan
Researching 529 plans for your kid(s)?
Here’s a quick, efficient way to arm yourself with the key facts:
You're looking for 2 main things:
- Does your state give any advantageous tax treatment to 529 plan contributions? If so, do those contributions need to go to that particular state's plan, or can they go to any state's plan?
- Does your state's 529 plan offer low-cost investment options? (Unfortunately some plans do not.)
If "yes" your state offers a tax deduction but only to its own plan and "yes" your state offers low-cost plans, then open in your state.
If "yes" your state offers a tax deduction but only to its own plan and "no" your state does not offer low-cost plans, then the analysis becomes a bit more complicated. Not to fear -- you can email us at email@example.com to ask for help and we can run our calculator for you to illustrate the trade-offs. (The general idea is that you "make" money on the tax benefit but "lose" money on the investment fees, but the net result depends on the actual numbers...if you want, we can help you with the relevant math.)
If "no" your state offers no deduction (OR if "yes" your state gives a deduction but that deduction applies for any state's plan), then pick any low-cost plan you like (Utah and New York are both well-regarded choices).
How to Get This Done
- Click here to view tax treatment of 529 contributions by state.
To see cost of the plans & investment choices, go to this website (provided as a non-profit service thanks to state treasurers).
- Click on your state and Utah. Submit the results. We suggest comparing your state to Utah because it's low cost & well-reviewed. There are other low-cost & well-reviewed plans (New York's Direct plan is another one) and you can feel free to check out as many as you want, but Utah is a sufficient benchmark of what a low-cost 529 plan looks like.
- Look at "Plan Type" -- we suggest focusing on the Direct-sold plans. Then scroll down to "Direct-sold plan fees" and "Investment Option Types".
Generally, you should prioritize low fees. This will usually lead you to passive funds, but there are some active funds with reasonable fee structures out there.
Oftentimes, the nice brochures make vague allusions to how thoughtful the investment process is, how diversified the holdings are, how focused they are on downside protection, how they could make tactical decisions, yada, yada, yada.
A good response to any of that is, "interesting, can you please show me specific, quantitative evidence of how all those attributes have resulted in out-performance vs. a relevant benchmark, over several different long-term time horizons, say each of 3, 5 & 10 years?"
While it’s indeed true that past performance does not necessarily predict future results, it’s a giant leap of faith to think performance will "take off" simply because you put your money in. A leap not worth taking, in my opinion!
Check out how the costs in your state stack up vs. Utah. Still need help? Drop us a note!
To see the 529 plan put in the context of a broader financial picture, we offer a free educational tool, the Financial Action Plan.