529s: The Best and Worst
Kelly Greene
Apr 24, 2005
Saving for your grandchildren's education? These states offer some of the best -- and worst -- opportunities.
So-called 529 college savings plans are popular for good reason. Earnings and withdrawals are exempt from federal taxes when you use them for a wide range of higher-education expenses.
But choosing the specific savings vehicle can be difficult. There are about 75 different plans in 50 states and Washington, D.C., all with various fees and some offered directly and others through brokerage houses.
Where to turn? First, the basics: The parent or grandparent who opens the 529 keeps control of the money; there are no income limits; and investors typically can contribute a maximum of a few hundred thousand dollars (the limits vary from state to state.)
At the same time, the funds you invest are no longer considered part of your estate. A married couple can contribute up to $110,000 at once to each child or grandchild without incurring gift taxes (using up five years' worth of their $11,000-a-year gift-tax exemption). There's one catch: If one of you dies before the five years are up, taxes kick in.
You also could set up a 529 through a nonprofit to create a scholarship for your alma mater, says Brian Orol, a certified financial planner in Raleigh, N.C. "You could get five or six grandparents together who came out of the same school and set up a $300,000-plus scholarship fund," he says.
And if you plan to return to the classroom later in life, you can open a 529 account for yourself.
Russell Hall, a certified financial planner in Wichita, Kan., says he's considering doing just that. "I've been thinking about going back to school for my master's degree and...starting a 529 plan and naming myself as beneficiary," he says.
How do you choose a plan? Look in your own backyard first, because some states offer decent tax breaks for in-state investors. New York, for example, offers a $10,000 state-tax deduction for married couples. And Virginia offers unlimited deductions for donors who are 70 or older. (To check out your state's perks, go to savingforcollege.com or www.collegesavings.org.)
But if you top your state's income limits for deductions, or your state has little or no income tax, it makes sense to shop around. Morningstar Inc., a Chicago investment-research firm, recently compiled a list of the best and worst 529 plans based on costs, the quality of underlying investments, flexibility of investment options, and the fund companies' records of how they treat shareholders.
The Utah Educational Savings Plan has the lowest costs because it uses Vanguard mutual funds and does the administrative work itself, says Kerry O'Boyle, a Morningstar analyst who researches 529 plans. One note: Utah fired an administrator in the past year for malfeasance, but "we don't think that investors are at risk," he says. Other top picks are the Michigan Education Savings Plan, the cheapest 529 managed by TIAA-CREF, and the Alaska T. Rowe Price College Savings Plan.
The worst 529 plans, in Morningstar's opinion, are offered by: Arizona and Wyoming, with "steep" fees for "mediocre funds and limited flexibility"; Alabama and Tennessee, with "sub-par plans and no meaningful tax break"; and Maine, which funds a matching grant program to low-income residents, but also has high fees "on top of a stable of overpriced -- and middling -- fund options."
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