With the cost of education continuing to increase, it is important to start saving for a child's college education at an early age. One of the best ways is through a 529 college savings plan.
A 529 account allows for tax-free growth and no future tax on the earnings if withdrawals are used for education expenses. Also, there are no income restrictions that limit who can contribute. There are many plans to choose from. Here are three important factors to consider when choosing a plan.
1. State Income Tax Deduction
In many states, residents qualify for some type of state tax benefit to encourage them to participate. These state level benefits vary from state to state with some states offering no tax benefit at all.
Most 529 plans are sponsored by individual states, and the tax benefit typically goes to residents of that state. So before selecting a 529 plan, check to see if your state offers an incentive that could save you money on state income taxes.
For example, Massachusetts offers up to a $2,000 deduction for married couples, $1,000 for singles. This deduction is available to Massachusetts taxpayers contributing to the Massachusetts UFund, which is managed by Fidelity. This Massachusetts deduction is set to expire at the end of the 2021 tax year.
2. Fund Expenses
You should also consider the expenses of the investment funds utilized in a particular 529 plan. Compare different plans to see which ones offer the lowest cost funds, especially if you are in a state that does not offer a tax incentive. You are not bound to your state’s plan, and can utilize another state’s plan if you feel it is superior. In some cases, the long-term costs associated with a 529 plan may exceed the tax benefits.
3. Direct or Advisor-Sold Plans
There are two types of 529 plans available to purchase. The first is the direct plan, which is offered directly to the consumer. The other is an advisor-sold plan offered through a “financial advisor” at a brokerage firm. These types of plans carry commission charges on top of the fund expenses. Advisor-sold plans tend to be more expensive than direct plans.
An example of a direct plan is the my529 plan, formerly known as the Utah Educational Savings Plan. This is a popular choice among fee-only financial planners because of its low-cost investment options, including mutual funds from Vanguard and Dimensional funds . You can check out their website here: https://advisor.my529.org/financial-advisors/ .