Wealth Advisory & Planning
May 13, 2022
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 Income from assets in these plans is never taxed as long as the funds are eventually withdrawn and used for “qualified education expenses.” In addition, more than 10 states offer pre-paid plans, which permit the purchase of tuition credits at today’s rates at a selection of the state’s public or private universities. Recently, 529 plans were expanded to include K-12 tuition. Since not all states comply with this inclusion, work 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 information from Morningstar and savingforcollege.com1, as shown below. Our intent is to update this “best of” list semi-annually. 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. On page 2 you also will find five questions to ask when considering 529 plans.
All plans have been ranked 4.5 or 5 caps by savingforcollege.com and Gold or Silver by Morningstar
Ranking Scale: Savingforcollege.com: 5 cap rating system; Morningstar: Gold, Silver, Bronze, Neutral, Negative Program Manager and Program Distributor reported by SavingforCollege
Five Decisions to Make in Choosing a 529 Plan
1. College savings plan or pre-paid plan?
With pre-paid plans, which permit the purchase of tuition credits at today’s rates at a selection of public or private universities, you need to decide for your mini-scholar the state in which he or she will 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 pre-paid 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 you have access to an advisor for guidance on the rules relating to 529 plans and other financial planning matters. That said, some passive investments may have lower expense ratios, and the commissions you may be charged in an advisor-guided plan could move dollars out of your beneficiary’s pocket.
3. Which state do I pick?
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 don’t count 529 plan assets for purposes of state financial aid, inheritance or estate tax purposes, or offer the account special creditor protection. The rules differ.
4. What should I invest in?
Fund choices in a 529 plan can range from more than a dozen to very few. The investments may be actively or passively managed, and performance of funds is reviewed and ranked annually and 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, don’t hesitate to contact your Relationship Management Team.
1Full Ranking List: savingforcollege.com 529 Rankings; Morningstar 529 Plan 2021 Rankings
This presentation is intended to provide a review of issues or topics of possible interest to Glenmede Trust Company clients and friends and is not intended as investment, tax or legal advice. It contains Glenmede’s opinions, which may change after the date of publication. Information gathered from third-party sources is assumed reliable but is not guaranteed. No outcome, including performance or tax consequences, is guaranteed, due to various risks and uncertainties. Clients are encouraged to discuss anything they see here of interest with their tax advisor, attorney or Glenmede Relationship Manager.