The Best And Worst 529 Plans

Almost a third of parents (29%) are now using 529 college savings plans to put money away for their kids’ college education, according to Sallie Mae’s most recent How America Saves for College report. The accounts remain one of the best ways to save toward college, since money grows tax free if the funds are used toward eligible education expenses.

However, not all 529 plans are created equal, according to Morningstar’s latest rankings. In fact, some of them are markedly better than others. Lower fees and better investment choices have moved some plans to the top of the list.

Morningstar’s Rating of 529 Plans

This year, Morningstar gave “Ratings of Gold” to four plans:

• Utah’s my529 plan
• Virginia’s Invest529 plan
• Illinois’ BrightStart Direct-Sold College Savings program
• Nevada’s The Vanguard 529 College-Savings Plan

Some of the negatively rated plans include the following:

• North Dakota’s College SAVE
• Arkansas’ GIFT College Investing Plan

529 Plans And Taxes

That said, Morningstar’s ratings are based on a national view, comparing plans relative to each other and not considering potential in-state tax benefits. That is, some states will give you an income tax break for investing in either their 529 plan or any 529 plan.

“That would be something that someone should consider if they’re eligible for an in-state tax benefit,” says Leo Acheson, associate director of multiasset & alternative strategies at Morningstar. In fact, Morningstar states that if you receive a tax benefit of 5% or more to invest in your state’s plan, it negates any higher fees and poorer investment options—so stay put.

(To get a sense of what your state tax benefit is worth, check this map from SavingForCollege.com.)

“You do want to consider how often you’re getting that benefit,” Acheson says. If you’re contributing on a regular basis and getting the benefit every year, that’s one thing. But if you’ve made a big lump sum contribution and you’re not seeing the tax break annually, it may be smarter to switch.

“Just be aware that some states have clawback provisions, so if you switch over to another plan, they can take that benefit back,” Acheson says.

Acheson estimates that while about half the country has an incentive to stay in state, the other half doesn’t—either because their state doesn’t have an income tax, their state allows a tax deduction no matter what plan they choose, or their state doesn’t offer a deduction at all.

Comparing 529 Plans

When you’re comparing plans and underlying investments, check the expense ratios, which tell you how much it costs to run the plans—and how much will be taken away from your earnings to do it. Smaller plans, such as those in North Dakota and Arkansas, have fewer investors and a smaller asset basis, so management fees tend to be higher.

While the top 529 plans have stayed fairly consistent over time, every year there are ratings changes. “This year there were nine downgrades and two upgrades,” Acheson says.

In general, some plans rise above others because while some states have upped their 529 games, the rest of the industry hasn’t kept up. “Plans that are standing still are actually falling behind, in terms of fees especially,” Acheson says. “As the whole industry continues to cut costs, a plan that doesn’t cut costs looks comparatively worse.”