Wealth Advisory & Planning
May 01, 2023
Choosing a 529 Plan
529 plans, also known as qualified tuition programs, provide a tax-advantaged way to save for a child’s or grandchild’s college education. Income and gains earned on assets held in these plans are not subject to tax as long as the funds are eventually withdrawn and used for “qualified education expenses.” In addition to 529 plans, nine states currently offer prepaid plans, which permit the purchase of tuition credits at today’s rates at a selection of the state’s public or private universities. Although Congress expanded the definition of qualified education expenses to include up to $10,000 per year for K-12 tuition, some states consider such tuition to be nonqualified, so you should consult with your advisors to ensure your eligibility.
To assist clients with their research on these plans, Glenmede’s Wealth Planning team has compiled a list of some of the top 529 plans based on in formation from Morningstar and savingforcollege.com, as shown below. These are all state-sponsored plans that are open to anyone regardless of residency. Some states offer tax savings only to residents who invest in their state’s plan, which savingforcollege.com factors into its “in-state” and “out-of-state” rankings. We also present five factors to consider when choosing a 529 plan.
Five Decisions to Make When Choosing a 529 Plan
1. College savings plan or prepaid plan?
With prepaid plans, which permit the purchase of tuition credits at today’s rates at a selection of public or private universities, to decide the state in which the child will be be studying, within reason. College savings plans are straightforward investments that provide more flexibility, allowing use of the account balance to cover books and supplies, equipment, fees, and room and board, in addition to tuition, at any college or university in any state. College savings plans also permit account balances to be “rolled” to another beneficiary if not used, which not all prepaid plans allow.
2. Direct plan or advisor-guided plan?
Generally, plans you can purchase directly offer more passive investments, while advisor-guided plans often feature more investment options along with the benefit of more active management. And the advisor often can give you guidance on the rules relating to 529 plans and other financial planning matters. That said, the passive investments available in direct plans may have lower expense ratios, and the commissions you may be charged in an advisor-guided plan could keep dollars out of your beneficiary’s pocket.
3. Which state do I pick?
The rules may differ by state. Some states offer their residents income tax credits or deductions for using an in-state plan. Other states may offer “tax parity,” or a deduction for contributions to any plan, wherever located. Some states do not count 529 plan assets for purposes of state financial aid and inheritance or estate tax purposes, or offer the account special creditor protection.
4. What should I invest in?
Fund choices in a 529 plan can range from more than a dozen to very few. The funds may be actively or passively managed, and their performance varies. Performance, rankings and other information about 529 plans can be found online at Morningstar.com, savingforcollege.com and other sites.
5. How much should I be paying?
Fees and expenses for investing are inevitable, but 529 plans can have a wide range. Look at the plan offering document for “total asset-based annual fees” to find the real number. If assets are actively managed, expect a higher fee. You may also want to explore other ways to reduce fees and add value, like automatic contributions, cash back to 529 credit cards or the Upromise program by Sallie Mae.
If you have questions, contact your Relationship Manager or visit us at www.glenmede.com.
This material provides information of possible interest to Glenmede’s clients and friends, and does not provide investment, tax, legal or other advice. Any opinions, recommendations, expectations and/or projections expressed herein may change after the date of publication. Information obtained from third-party sources is assumed to be reliable but may not be independently verified, and the accuracy thereof is not guaranteed. Any potential outcome discussed, including but not limited to performance, legislation or tax consequence, ultimately may not occur due to various risks and uncertainties. Clients are encouraged to discuss any matter discussed herein with their tax advisor, attorney or Glenmede Relationship Manager.