ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel
  • »
  • Personal Finance»
  • Paying for College

Best 529 Plans for College Savings

Updated on August 12, 2013

Is College in the Future?

I know that Suze Orman would advise my husband and me to save first for retirement and then invest in college savings for our four children. But now that my oldest has just turned 14 and is going into high school next year, we have turned our attention back to the 529 plans we opened nearly 10 years ago.

There are many ways to save for college, but one of the most popular investment vehicles is the "529 Plan," offered by each of the fifty states in the U.S.A. The money you put in grows tax-free over the years, and when it is withdrawn for college expenses, the interest is never taxed.

A 529 Plan can be started for any person, by anyone, even for yourself! A parent, grandparent or other friend or relative maintains the account in their name (unless the 529 plan is created for you), which means that the impact on the student's financial aid eligibility is reduced. Further, compared to other college savings vehicles that are held in the student's name, including a Uniform Gift to Minors Account (UGMA aka Uniform Transfer to Minors), the assets in a 529 plan are assessed at a lower rate on federal financial aid forms.

Saving for the college in the future
Saving for the college in the future | Source

What is a 529 Plan?

A so-called "529 Plan" receives its name from the section of the Internal Revenue Code (IRS) Code that allows college savings funds invested in a specialized investment account to grow, without being subject to federal taxes. Investments in a 529 Plan can help cover college tuition, required textbooks and many room and board costs.

In addition to growing tax-free, when a beneficiary withdraws money for so-called "qualified education expenses," the withdrawals are not subject to federal taxes, either. Some states also allow tax credits or deductions for 529 plans held by residents.

Although many people have been wary of making investments in the stock market recently, a dollar-cost-averaging approach of putting a consistent amount into a fund like a 529 Plan will allow you to take advantage of dips in the market because you'll be buying low (i.e. getting a bargain). The accounts are managed by investment funds such as Schwab, TIAA-CREF, Vanguard and Fidelity.

While you are not guaranteed a rate of return, you can manage the amount of risk to take, depending on the child's age and how many years until he or she attends college. As with retirement accounts, 529 Plan accounts for younger children can be more heavily weighted in stocks, but as they near college age, funds may be shifted to more conservative investments.

Most states allow you to either go with an account in which you can invest directly, and a portfolio that can only be purchased through advisers or brokers. All states, except for Washington State,

Basics of a 529 Plan

Top 10 State 529 Plans

According to SavingsforCollege.com, these states currently offer the best 529 plans for college savings*:

  1. Kansas
  2. Michigan
  3. Alaska (via University of Alaska)
  4. Maryland
  5. Nevada
  6. Wisconsin
  7. Alaska (via T. Rowe Price)
  8. Utah
  9. Virginia
  10. Ohio

*Rankings based on 5-year investment performance (2005-2010).

Common Questions and Answers About 529 Plans

Q: How many 529 Plans are currently in existence? A: There are a total of 117 plans, as of the date of this publication. Some states offer more than one 529 Plan.

Q: Who can enroll/invest in a 529 Plan? A: Anyone interested in setting money aside to pay for college expenses, regardless of state residency or relationship to the future student.

Q: Where are 529 Plans offered? A: All 50 states in the U.S. offer the plans. They are not offered in any other country - at least not as a "529 plan" - however.

Q: What is the minimum amount required to open a 529 Plan? A: This varies, depending on the plan, but may be as low as $25.

Q: Do I have to make regular contributions to a 529 Plan? A: No, you are not required to do so. You can make one-time contributions as you wish. However, like many types of savings accounts, it helps to have regular investments automatically made each month so you do not miss the money!

Q: Do you have to be a resident of the state in order to invest in its 529 Plan? A: No. In fact, we live in Oregon and have 529 plans for our children in Michigan. However, many states offer their residents state income tax deductions for 529 plan investments in their state's program.

Q: If I have a 529 Plan in California, does the student have to attend college there? A: No. It does not matter where you live, or where your child wants to go to college. My kids, for example, can choose any higher education facility to attend.

Q: Do I have to be related to the student for whom I am investing in a 529 Plan? A: No. Anyone can open a 529 plan for any beneficiary, regardless of relation. You can even save for your own future higher education costs.

Q: What is the average return on investment for a 529 Plan? The 5-year returns for 529 Plans (2005-2010) averaged 3.3% according to Morningstar.com.

Saving money for college
Saving money for college | Source

Can you Decide Not to Go to College?

No matter what type of 529 Plan you have, whether a pre-paid tuition program (like that offered in Washington State), or a traditional savings plan, you are not required to go to college. However, if funds are not put toward for tuition or other qualified education expenses, you will be charged penalties and taxes, but only on the earnings, not on the entire amount withdrawn.

What Makes a Good 529 Plan for College Savings?

Back in 2002, I researched and compared 529 plans for several months before settling on the Michigan Education Savings Program (MESP). Among the factors we considered included low fees, a variety of diversified investment choices and the option of direct investment, rather than purchasing through brokers. Plus, we tend to be conservative investors.

According to Kiplinger.com:

The Michigan Educational Savings Program, run by TIAA-CREF, is ideal for investors who shy away from putting their college savings into the stock market. The plan has a savings option that guarantees principal and a minimum annual interest rate based on a Treasury note index. That option doesn't charge an annual fee. The plan also offers portfolios of TIAA-CREF mutual funds that are tilted more toward bond funds than most other 529 plans. Those options cost a very low flat fee of 0.45% annually.

You should make your own investment decisions in choosing a 529 Plan, considering: (1) tax breaks offered by your state; (2) fees/costs of a plan; (3) mixes of investment choices; (4) underlying fund portfolios; and (5) quality of advisors or brokers, if you would rather work with - and pay - a professional than make direct investments yourself.

If you have questions concerning how a 529 Plan fits into your overall investment strategy, consult your account or CPA.

Recent Improvements in 529 Plans

Private College 529 Plans

As of 2003, there is another 529 Plan option for people saving for college. The Private College 529 Plan allows parents to lock in current private college tuition rates via a pre-paid plan. That means you can purchase 4 years at MIT - up to 30 years from now - at today's tuition prices. Pretty amazing, don't you think?

There are currently 270 colleges and universities that are participating across the United States. As with state-sponsored 529 plans, there are penalties and taxes that apply if your student does not withdraw the funds for private college expenses and you request a refund. However, you can change the beneficiary of the plan to another child, or roll it over to a state 529 plan.

Have You Used a 529 Plan to Save for College Expenses?

See results

Comments

    0 of 8192 characters used
    Post Comment

    • stephhicks68 profile image
      Author

      Stephanie Hicks 6 years ago from Bend, Oregon

      Indeed Tara - my oldest is only 4 1/2 years away from college and making sure there is enough in savings for his education definitely snuck up on us. Best, Steph

    • profile image

      Tara 6 years ago

      It's something parents need to think about. Thanks much for the info - I could use this! :)

    • stephhicks68 profile image
      Author

      Stephanie Hicks 6 years ago from Bend, Oregon

      Thanks anginwu and always,

      People looking to save for college shouldn't be put off by 529 plans. They are quite flexible and offer tremendous tax benefits. Thanks for the comments - Stephanie

    • anglnwu profile image

      anglnwu 6 years ago

      529 sounds like a solid plan. Good to know that anyone can open up an account with as little as $25. Thanks for the great financial hub.

    • always exploring profile image

      Ruby Jean Richert 6 years ago from Southern Illinois

      Great information. 529 plan is new to me. Thank you..

    • stephhicks68 profile image
      Author

      Stephanie Hicks 6 years ago from Bend, Oregon

      Thanks both of you! Saving for college has been on my mind a lot recently, as our children are getting older. Glad to hear this was helpful. Best, Steph

    • profile image

      soniacharan 6 years ago from Mumbai,INDIA

      FINANCIAL GREAT HUB!!!

      RECOMMENDED...

      WAY TO EARN AND SAVE MONEY...

    • brandasaur profile image

      brandasaur 6 years ago from Planet X

      this is a Helpful hub. Thanks stephhicks68!

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: "https://hubpages.com/privacy-policy#gdpr"

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)