In most cases, they’re the best option for our clients when they want to ensure a smooth financial ride through college for their kids or grandkids.
The reason? They offer unbeatable tax benefits, flexibility, estate planning advantages and solid growth potential, all wrapped up in one neat little package.
How to pick the right one
But here’s the wrinkle.
As you may know, there are a lot of college plans out there (over 100 at last count), and many people feel overwhelmed when it’s time to pick the one that’s best for them.
But in reality, it’s not that hard a process. When we recommend plans for clients, we look for the best mix of convenience, tax breaks, low expenses and winning investment options. The best choice often depends on what state our client calls home, since some states offer generous tax benefits for in-state residents, while for others (like us Floridians) state taxes are not an issue.
Gold and silver winners
For those of you picking a plan on your own without the help of a financial planner, start by taking a look at Morningstar’s annual ranking of best plans.
Just recently Morningstar named nine 529 college savings plans as its choices for Gold and Silver “best plan” winners.
Of the 64 plans reviewed, nine earned Gold or Silver honors, 23 earned Bronze, 28 earned neutral ratings, and only 4 earned outright negative ratings.
The four Gold plans were Alaska (managed by T. Rowe Price), Maryland (T. Rowe Price), Nevada (Vanguard) and Utah (Vanguard).
The five Silver winners were Arkansas (iShares), California (TIAA-CREF), Michigan (TIAA-CREF), Ohio (various managers) and Virginia (American Funds). Virginia’s CollegeAmerica plan, run by American Funds, happens to be the nation’s largest with $41 billion in assets.
What are the magic ingredients that make for a winning plan? Morningstar says it looks for “strong menus of investment options, solid management, and reasonable fees” in selecting its favorites.
While Morningstar’s guidance can be helpful, keep in mind that plans not on their list may still be excellent options.
In fact, not every plan out there was reviewed or ranked. For example, Morningstar says it neglected to rate 21 of the industry’s smallest plans (including Florida’s college savings 529, often overshadowed by our state’s more popular prepaid college plan).
What not to pick
Morningstar did single out a few 529 plans to avoid, most due to excessively high fees for mediocre investment options.
Unfortunately, we often see parents saving and paying for college in ways that are at best a total waste of time, and at worst, guaranteed tickets to undermining their own financial security or their child’s chances at financial aid. (Some of our least favorite options? Savings accounts paying negligible interest, custodial accounts for minors, insurance policies with high commissions and big surrender charges, and so on).
It’s great to help your child or grandchild afford that all-so-important college degree. It’s one of the most valuable gifts with which to endow the next generation.
But make sure you save smart. Ask your financial advisor for guidance, or check out some of the free information available online at sites like Savingforcollege.com, The College Board, or College Savings Plan Network.