The Best 529 College-Savings Plans

published 1 August 2007

You don't have to open a 529 college-savings plan in your home state. A total of 49 states and the District of Columbia offer 529s (Wyoming has adopted the Colorado plan as its own, and Washington offers only a prepaid plan).

Most states let you choose between accounts that you invest in directly and portfolios that you purchase only through advisers or brokers. More than half of 529 investors buy broker-sold plans, which carry sales charges and offer more investment options. But you can find an adequate selection in a direct-sold plan. And its lower expenses mean that more of your money will go toward building your college fund.

Factor in state tax breaks, which vary widely. Some states allow you to deduct your entire 529 contribution from your state income tax; others limit the deduction to a few thousand dollars or less. Several states let you deduct excess contributions in future years, but they differ on how much you can carry over. A few states place income restrictions on who can benefit from deductions for 529 contributions. Check your state's tax rules before you make a decision.

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Best plan for conservative investors. The Michigan Educational Savings Program, run by TIAA-CREF, is ideal for investors who shy away from putting their college savings into the stock market. The plan has a savings option that guarantees principal and a minimum annual interest rate based on a Treasury note index. That option doesn't charge an annual fee. The plan also offers portfolios of TIAA-CREF mutual funds that are tilted more toward bond funds than most other 529 plans. Those options cost a very low flat fee of 0.45% annually.

Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Alabama doesn't offer a state income-tax deduction for contributions to its own 529 plan. But Alabama residents are subject to state income tax on the earnings portion of withdrawals they make from out-of-state 529 plans, so the in-state plan has an advantage.

Why? Alaska doesn't have a state personal-income tax. Because there's no tax break for contributions to an in-state 529 plan, you can choose any plan you like. The University of Alaska College Savings Plan is similar to the Maryland College Investment Plan, which we think has the best portfolio of underlying mutual funds. That Alaska plan is worth considering, though, if your beneficiaries want to attend school in-state. The University of Alaska College Savings Plan offers the ACT portfolio option, which guarantees protection from tuition inflation if the proceeds are used to attend the University of Alaska.

Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to an in-state 529 plan can fully deduct contributions up to their adjusted gross income from their state income tax. The tax break trumps lower fees in an out-of-state 529.

Why? The direct-sold District of Columbia plan lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to a DC 529 plan are eligible to deduct up to $3,000 from their district income tax. Those who contribute more than that can deduct the excess in future years. The tax break trumps lower fees in an out-of-state 529.

Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to an Illinois 529 plan can deduct up to $10,000 per contributor (up to $20,000 for joint filers) from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.

Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to an Indiana 529 plan can claim up to $1,000 in state income-tax credits per tax return each year. (A credit is more valuable than a deduction because it reduces your taxes dollar-for-dollar.) The tax break trumps lower fees in an out-of-state 529.

Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to a Mississippi 529 plan can deduct up to $10,000 (up to $20,000 for joint filers) from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.

Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to a Montana 529 plan can deduct up to $3,000 (up to $6,000 for joint filers) from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.

Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to a Nebraska 529 plan can deduct up to $2,500 (up to $5,000 for joint filers) from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.

Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to a New York 529 plan can deduct up to $5,000 (up to $10,000 for joint filers) from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.

Why? Residents who contribute to a North Carolina 529 plan can deduct up to $2,000 (up to $4,000 for joint filers) from their state income tax each year. To qualify for the deduction, you must have an adjusted gross income under $60,000 if you're single, under $100,000 for joint filers, or under $80,000 if you file as head of household. The tax break trumps lower fees in an out-of-state 529. If you don't qualify for the deduction, pick the plan that's best for you regardless of which state sponsors it.

Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to an Ohio 529 plan can deduct up to $2,000 from their state income tax each year. Those who contribute more than that can deduct the excess in future years. The tax break trumps lower fees in an out-of-state 529.

Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to an Oregon 529 plan can deduct up to $1,000 (up to $2,000 for joint filers) from their state income tax each year. Those who contribute more than that can deduct the excess in future years. The tax break trumps lower fees in an out-of-state 529.

Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to a Rhode Island 529 plan can deduct up to $500 (up to $1,000 for joint filers) from their state income tax each year. Those who contribute more than that can deduct the excess in future years. The tax break trumps lower fees in an out-of-state 529.

Why? Residents who contribute to a Utah 529 plan can claim a maximum state income-tax credit of $87 (or a $174 credit for joint filers) per beneficiary each year. A credit is more valuable than a deduction because it reduces your taxes dollar-for-dollar. The tax break trumps lower fees in an out-of-state 529. Plus, the Utah 529 plan charges very low fees compared with other 529s, and Utah residents don't have to pay the $20 annual maintenance fee levied on out-of-state investors.

Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to a Virginia 529 plan can deduct up to $2,000 per account from their state income tax each year. Those who contribute more than that can deduct the excess in future years. Contributors who are age 70 and older can fully deduct their contributions from their state income tax. The tax break trumps lower fees in an out-of-state 529.

Why? This plan sold directly through the state lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. And this direct-sold plan allows you to buy portfolios of funds from Dimensional Fund Advisors, a family of first-rate index funds that you would normally have to purchase through a broker or adviser. Plus, residents who contribute to a West Virginia 529 plan can fully deduct contributions from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.

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