Choose the Right 529 College Savings Plan

Get the most out of your 529 plan by avoiding these missteps.

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Fifteen years after their inception, 529 plans remain popular as an effective way for families to save for college expenses. There are many different plans to choose from, each with various features and advantages. However, just like any investment plan, you should evaluate your options carefully.

When deciding which plan is right for you, there are four common mistakes to avoid:

Automatically Enrolling in Your Own State’s Plan

There is a wide range in the quality and costs of 529 plans. There is no reason to automatically open a 529 plan with your state’s name on it unless you will truly reap a reward by doing so. The most common reward for investing in one’s own state 529 plan is a decrease in your resident state taxes. Some states, such as New York and Indiana, provide substantial tax benefits if you invest in their plan.

Another good reason for low- and middle-income families to consider their own state’s 529 plan is if it provides a match on contributions or other special benefits. For example, New Jersey has a unique benefit for state residents, regardless of income level—a one-time tax-free scholarship of up to $1,500 to a beneficiary who goes to a New Jersey college.

Although your state plan may offer state tax savings and other advantages, it may also have high fees that may actually neutralize the benefits. If this is the case, then contribute the minimum you need to in your state plan to get the benefits and contribute the balance to a low-cost 529 plan.

Failing to Properly Evaluate Costs

One type of fee that some 529 plans charge that you should not have to pay is the account maintenance fee. This is typically levied for accounts with low balances or for participants who do not live in the state. There are plenty of good 529 plans available that do not charge this fee.

Two other types of fees include those for the management of the 529 plan and for the mutual funds in which the 529 plan invests. Some plans list these separately and others bundle them. Make sure you focus on and clearly understand what your total fees will be. Some of the lowest-cost 529 plans, charging between 0.25% and 0.35%, are offered by Iowa, Michigan and New York.

If your child is close to or already attending college and you want to invest very conservatively, then you can do so for free in numerous 529 plans, including those administered by Connecticut and Michigan.