In our last post we discussed the basics of 529 college savings plans. Now it’s time to turn our attention to how to choose between 529 plans based on what makes sense for you and your family.
In my former career at Morningstar, we used an extensive methodology when comparing and contrasting more than 80 available 529 plans each year. You don’t necessarily need to crunch the numbers as extensively as we did, but there are some key factors worth considering in your apples-to-apples comparisons among prime candidates. In fact, they are mostly the same factors I’ve recommended before, for assessing the worth of any investment vehicle expected to contribute to your personal financial goals. These include:
What is it costing you? It’s simple. The more the plan costs, the less you get to keep. On top of the usual fund expenses, there are the costs related to managing the plan itself, so be careful to look at the combined expenses when evaluating 529 plans.
What are the expected tax benefits? Nearly the entire point of saving using 529 plans is to minimize the usual bite that taxes take out of the proceeds. If there are not enough tax benefits to be had, you’d likely opt for the far more flexible control you’ve got over your regular, taxable investment account. It pays to turn to a tax professional to help you assess the true, net benefits you can expect from the plans you are considering.
Can you apply the same evidence-based investment strategy we advise for your regular investments? Even if a plan is tax-favorable and attractively priced, it may still be penny-wise but pound-foolish if all or most of its fund offerings force you into actively managed funds that run counter to how markets are expected to deliver long-term wealth to patient investors.
Is the plan flexible enough to accommodate your particular needs? Without going into painful detail, this final question can be the most subjective, in that the precise rules of engagement vary widely among the various plans. You’ll want to be on the lookout for “gotchas” that may apply to your circumstances, and avoid plans that contain them.
How well does it glide? One of my favorite flexibility features is the ability to set up and customize your investment glide path. When a glide path is locked in by the plan, the balance between “riskier” stocks and “safer” bonds grows increasingly conservative as your child reaches college age, with no ability to customize the allocation. A customizable, flexible glide path lets you determine when or if you want to glide toward more conservative allocations. This customization is particularly helpful when you’re working with a professional advisor. He or she can then ensure that your 529 plan allocations complement your family’s overall goals. For an example of what a glide path looks like, click here*.
Narrowing the Playing Field
If your head is swimming by now, wondering how you’re going to compare and contrast plans nationwide, I’ve got some good news for you. Morningstar provides excellent resources in the Save for College area of its website. Another fine resource is www.SavingforCollege.com, which offers multiple tools for running comparisons on different plans.
In addition, we strongly advise you to conduct a thorough, personalized due diligence with the guidance of a professional advisor before investing in a 529 plan or any other investment vehicle The state plans that meet all of the above considerations – including a customizable glide path and availability of Dimensional Fund Advisors’ evidence-based fund line-up – are very few and far between. Which one, if any, is right for you and your family? Give us a call, and we’ll figure that out together.
For more information or to set up a consultation, contact Pathway Financial Planning at or email firstname.lastname@example.org.
*This is not a recommendation or endorsement for New York’s 529 plan. The link provided is an example of a glide path for “age-based” investment options.