If you’re a new parent you might want to start thinking about 529 plans. 529 plans are great for helping you save for your child’s education. By starting early, you’ll have to put away less money overall since the miracle of compound interest will help you greatly increase your savings by the time your child gets to be old enough.
But if you’re going to invest in a 529 plan, you might as well know which are the best 529 plans to invest in.
Prepaid Plans vs. Investment Plans
There’s often great debate over which plan is better. A prepaid plan allows you to pre-pay for your child’s college tuition at a discounted price. When your child is then ready for school and tuition prices have increased, you’ll have a tuition credit.
The problem with these plans is that it usually requires you to have a very specific idea of where your child will be going to school. These plans generally limit you to sending your kids to public universities in your state. If your child decides they want to go elsewhere or is unable to get into the school, you still get access to the funds, but they won’t have been invested as aggressively so you will end up with less money in total than you would have had if you had chosen an investment plan.
Prepaid plans are best for parents with older children when the children are fairly certain where they would like to attend.
Investment plans, meanwhile allow the ultimate flexibility and give you a number of options regarding investment strategies and school choice. Many investment plans make my list of the best plans available.
What You Should Look For
Check Your State: First and foremost, you should check to see if your state offers tax benefits for residents who invest in their state 529 plans. The best 520 plans are those that cost you the least amount and give you the best return and because of this state tax break, that makes your state’s 529 plan the best bet for you. While you can still invest in other state’s 529 plans, you won’t get the tax benefits.
States that give tax breaks are Alabama, Arizona, Arkansas, Colorado, Connecticut, District of Columbia, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Michigan, Mississippi, Missouri, Montana, Nebraska, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Utah, Vermont, Virginia, West Virginia, Wisconsin.
Look for a Low Management Fee: 529 investment plans will charge a program fee so be sure that you don’t choose one with a high program fee. The best have fees below 0.80%. Any higher, and it might jeopardize your returns.
Decide on Asset Allocation: Do you want your investment plan to take a more conservative approach to investing, or a more aggressive approach. Decide how much risk your willing to take and then choose which mutual funds in your 529 plan that you want your money invested in. Not everyone will agree on the best ones because whether a plan is right for you will depend on your investment strategy.
Generally, it’s recommended that you invest more conservatively as your child ages. You can tweak the asset allocation yourself as your child ages, or you can invest in a fund that will do it for you by investing in an aged-based fund.
Which Plans to Consider 2020-2021
The following plans were recommended by Morningstar which releases a report every year on the best plans basked on their performance, price, parent, process, and people. I provide you with a sampling of information about the plans, their fees, and their returns. For full information, please see their websites for more details.
529 Plans – Gold
Maryland College Investment Plan: The Maryland plan charges between 0.07%-0.88% and a $10 maintenance fee. They offer age based options and static options for investing. Their plan has impressive returns with their high risk/high equity plans returning up to an average of 23.05% over 5 years.
T. Rowe Price College Savings plan: This company also manages the Maryland College Investment Fund and so to have two funds win gold and be among the best plans is quite an accomplishment. The plan charges 0.20% annually and a $10 maintenance fee. The maintenance fee is waived if enable monthly contributions or have a total balance of $25,000 for the beneficiary or $75,000 across beneficiaries. Their best five year return is an average of 17.22%.
The Vanguard 529 Savings Plan: The Vanguard plan charges as low fee of between 0.19%-0.49%. They have both static and age based options and their returns vary between -1.21% and 9.83% in average annual returns over the last five years. Over the last year, they have returned between -5.28% and 29.85%.
Utah Educational Savings Plan: The Utah plan charges a very low 0.16%-0.22% and has no maintenance fee. They have a number of age based and static plans to choose from and their high equity/high risk plans have returned up to an average of 23.88% over 5 years.
529 Plans – Silver
CollegeAdvantage 529 Savings Plan: The CollegeAdvantage plan charges a low rate of 0.22%-0.74% and has no maintenance fees. They offer both mostly static funds but they have 4 age based funds to choose from as well. Their static plans are ranked very highly by Morningstar despite the fact that were rated Silver on the list. Their aggressive growth high stocks fund averaged 18% in the last 3 years.
CollegeAmerica: The CollegeAmerica plan charges a very low rate of 0.79% and has a $10 maintenance fee. They offer a selection of age based and static funds to choose from. Their high equity portfolio has returned up to 34.64% in the last year.
iShares 529 Plan: The iShares plan charges a very low rate of 0.32%-1.02% depending on the fund you choose and has no maintenance fees. They offer a selection of age based and static funds to choose from. Their funds have returned in the last year anywhere from -0.32%- 29.58%.
Michigan Education Savings Program: The Michigan plan charges a very low rate of 0%-0.31% and has no maintenance fees. They offer a smaller selection of age based and static funds to choose from and are known for being a more conservative fund. Their high equity portfolio has returned 21.42% in the last year.
ScholarShare College Savings Plan : The ScholarShare plan charges from 0.30%-0.58% depending on the fund you choose and has no maintenance fees. They offer a selection of age based and static funds to choose from. Their best performing single fund portfolio returned 20.68%
*Please note: Just because a fund has performed well in the past does not mean that it will perform well in the future. Be sure to do your due diligence before choosing a plan that is right for you. All the information listed here is to the best of my knowledge and might not be accurate at the time you read this.*
Project CRediT sources data from Wealthy Genius including net worth, earnings, and various wealth statistics.