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Choosing the Right Section 529 Plan - Important Features to Consider

An Overview of Choosing the Best Section 529 Savings Plan for You


If you’re contemplating the use of a Section 529 plan to fund a loved one’s education, the process of narrowing it down to one plan can be daunting. There are over sixty plans available to investors, and none of them are exactly alike. But then again, no two investors are exactly alike either!

Choosing the right plan for you will ultimately come down to comparing the universal features among all the plans. By identifying these features and how they vary from plan to plan, you can make an informed decision about which plan best fits your unique financial situation.

It’s important to remember that many states allow residents from out-of-state to use their plan. This can be done even if you have no intent of going to school in that state. What this ultimately means is that the best plan for you may not be the one your state offers.

Savings vs. Prepaid

The first question is, "do you want to prepay tuition or build a portfolio?" While many people loosely throw around the term “Section 529 Plan,” there are actually two kinds of plans.

Prepaid tuition plans allow you to purchase future units or semesters of education at today’s prices. Savings plans allow you to invest money that will grow according to how your chosen investments perform.

If you want safety and simplicity, you are generally going to do better to choose a prepaid tuition plan. If it’s going to drive you nuts not to earn a competitive rate of return, then you’ll want to use a savings plan.

In-State vs. Out-of-State

Many states offer income tax benefits to their residents for contributing to a Section 529 plan. Some states offer a deduction or credit for using their home state’s plan, while others offer exemptions from income tax on the withdrawals. There are even a few states that offer both.

If your state offers a sizable benefit for using their plan, you will want to give that a good look. Saving money on your taxes, which in turn could also be contributed to your Section 529 plan, will turbo-charge your college fund’s growth.

Investment Options

While the Prepaid Tuition Plans offer the ability to “invest and forget,” the savings plans offer you the ability to direct your investments. If you’re using a savings plan, it’s important to select one that has good variety of investment options.

Some plans have 5-10 investment options (which may be too few), while some have as many as 200-300 (which is probably excessive). Ideally, a Section 529 Savings Plan will have a menu of 20-30 solid performers across all assets classes (large stocks, small stocks, bonds, and cash).

Some people make the mistake of picking a Section 529 plan that has one or two extraordinary stock funds, with the rest being mediocre. The problem with this is, as you get closer to using the funds, you will likely become more conservative. If your plan has mediocre conservative options, you may find yourself under-performing in your final years.

A number of the plans offer “aged-based” investment options. These programs provide pre-mixed portfolios based on your child’s age. They automatically become more conservative as the start of college gets closer. Assuming that the underlying funds are solid performers, this is a great way to lighten your workload.

Contribution Rules

When it comes to how much you can put into a Section 529 plan for each beneficiary, each plan is slightly different. While most plans have maximums that most parents will never reach ($200,000-300,000 per child), they also might have minimums on the initial and additional investment amounts.

Many of the plans let you invest as little as $25 for your initial and follow-up investments. Even better, many of these plans will allow you to set up an automatic withdrawal from your bank account or paycheck. While the plans with higher limits aren’t necessarily any worse, they may not fit certain investors’ funding abilities.


There’s an old saying that “No one works on Wall Street for free.” It’s no different with Section 529 plans. These plans may have anywhere from one to three layers of people who want to get paid for their role in managing or marketing the plan.

Naturally, the state will need to cover the administrative costs of providing a Section 529 plan. For prepaid tuition plans, this is usually incorporated into their management of the assets. For a Section 529 savings plan, it will be expressed as an annual program management fee (usually $25 -50 dollars) or as a percentage of assets (.25% per year). Some states charge both.

For Section 529 savings plans, the mutual fund company that manages the assets will also need to get paid. They charge an annual “expense ratio” on your money, depending on which mutual fund it is invested in. This fee can range from less than one-tenth of one percent, to over 2%. That huge swing in fees can have a dramatic effect on what you actually earn.

Lastly, if you buy your Section 529 savings plan through a broker, they will also have to get paid. Much of the time, they are paid out of the expense ratio charged by the mutual fund company. But there are a number of plans that charge you a commission (or a surrender fee) if you purchase them through a broker.

As a rule of thumb, you should try to keep your combined annual expenses from all these categories under 1-1.5%. While the higher priced plans may offer you some great investment options or plan features, the cost will slowly chip away at your investment growth.


By comparing the common features among plans, you’ll be better able to make an informed decision about which plan will serve you the best. Don’t get lured into using your state’s plan without looking at the others available to you. Likewise, don’t fall in love with a plan solely because it has high returns, without looking at the fees and restrictions associated with it.

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