There are scores of different tax-free savings programs for college — and even K–12 private-school tuition, in some areas and plans. That’s a great way to cut taxes, but most of the accounts have limited investment choices and restrictive trading opportunities. Despite these obstacles, you can pump up your long-term gains using simple techniques.
Everyone who wants to help a kid eventually go to college is forced to evaluate more than 80 different tax-privileged college savings plans in the United States alone. In America, they’re known as “529 plans,” after the section of IRS code that authorizes them. In Canada, a similar program is called the Registered Education Savings Plan (RESP). In the UK, it’s a Junior ISA, and so forth. In this article, the term “529” is used as a catch-all, but be sure to adapt to the laws in your area.
Whatever you call them, 529-type plans add up to a serious chunk of change. American families held $329 billion in 13.6 million of these accounts as of June 30, 2018, based on a College Savings Plans Network report. That amount is less than the $5.3 billion that more than 50 million American households had in employer-based 401(k) plans on the same date, according to an ICI study. But those hundreds of billions of dollars being saved for schooling ain’t no chicken feed. People want that money to grow at a rapid clip — fast enough to pay crushing educational expenses for one or more young’uns.
To cut taxes on your savings, a 529 program isn’t shabby
Purely from the point of view of tax-free gains, a 529 plan can be more attractive than a Roth IRA:
- No matter how high your income, you can contribute to a 529 plan (no phase-out).
- You pay no federal gift tax, and some states offer deductions on your contributions, up to a limit.
- You pay no federal or state income tax (in some states) on gains in the account.
- You pay no tax on money you withdraw for college (or K–12 private schools, in some plans).
- If your kid gets a full scholarship or doesn’t go to college, the account can be transferred.
Besides tax breaks on your federal income tax, more than 30 US states, plus the District of Columbia, offer tax deductions for 529 plans. Deductions for deposits into any state’s 529 plan are allowed by Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana, and Pennsylvania. For complete details, see Saving for College’s map.
Out of scores of plans, these are rated the best
Morningstar announced on Nov. 1, 2018, that the following four 529 plans now enjoy the advisory firm’s highest rating of “gold.” The list is in alphabetical order, showing in parentheses the state that administers the plan (but remember, most plans are open to residents of all states):
- BrightStart Direct-Sold College Savings Program (Illinois)
- Invest529 Plan (Virginia)
- My529 Plan (Utah)
- Vanguard 529 College Savings Plan (Nevada)
The Saving for College website uses its own 529-plan ranking criteria. These include low fees, broad investment choices, and good market performance. This produces a slate of plans the site rates “Top 10.” They actually number more than 10 (unless otherwise noted, all plans are open to residents of all US states):
- 529 College Savings Program (New York)
- 529 Plan College Advantage (Ohio)
- College Savings (Iowa)
- CollegeChoice 529 Direct Savings Plan (Indiana)
- Edvest (Wisconsin)
- Florida 529 Savings Plan (Florida)
- Future Scholar 529 College Savings Plan (South Carolina residents only)
- Learning Quest 529 Education Savings Program (Kansas)
- Maryland 529 College Investment Plan (Maryland)
- National College Savings Program (North Carolina)
- NEST529 Direct College Savings Plan (Nebraska)
- NextGen 529 (Merrill Edge, all states)
- Oklahoma College Savings Plan (Oklahoma)
- Path2College 529 Plan (Georgia)
- ScholarShare 529 (California)
- Schwab 529 College Savings Plan (Kansas)
- Smart529 WV Direct College Savings Plan (West Virginia residents only)
- SSGA Upromise 529 Plan (Nevada)
- T. Rowe Price College Savings Plan (Alaska)
- TD Ameritrade 529 College Savings Plan (Nebraska)
- University of Alaska College Savings Plan (Alaska)
- USAA 529 College Savings Plan (Nevada)
- Vanguard 529 College Savings Plan (Nevada)
The only agreement is confusion
What the heck?! There’s almost no overlap in the two rating systems! Only one plan — hello there, my old friend, comfortable as a well-worn shoe: Vanguard — shows up on both lists of the supposedly “top, gold-rated” plans. How can an educational savings plan that should be very simple actually be so convoluted?
The above overview is just the beginning of maximizing your educational investments. In the rest of this four-part column, we’ll see how to make sense of the riot of choices. More importantly, we’ll demonstrate the techniques of 21st-century behavioral finance to pump up the gains of the best programs — even ones that seem at first glance to have serious limitations.
With great knowledge comes great responsibility.
CEO, Muscular Portfolios
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