Americans have amassed $450 billion for educational expenses in 529 plans as of August 2024, according to the Education Data Initiative. That amounts to around an average of $27,741 for the estimated 16 million families participating in 529 plans. With so much money on the table and college costs ever rising, families should carefully consider how to pick the best 529 plan for their needs.
Here’s how to take full advantage of 529 college savings plans — and it’s not just parents who can enjoy the tax benefits either.
Best 529 plans
These state plans offer college savers a solid combination of low costs, good benefits, and a proven track record of investment performance. After all, these are three big things you should be looking for in any 529 plan.
- Ohio’s 529 plan, CollegeAdvantage
- New York’s 529 plan, Direct Plan
- Wisconsin’s 529 plan, Edvest
- West Virginia’s plan, Smart 529 WV Direct College Savings Plan
- California’s plan, ScholarShare 529
Ohio’s 529 plan, CollegeAdvantage
Ohio’s plan offers savers a diversity of investment plans — two based on age and five based on your risk tolerance, as well as other investment options, including FDIC-backed accounts. The plan uses Vanguard funds, a leader in low-cost funds, and DFA funds. The plan is available for both in-state and out-of-state savers, and it offers up $4,000 in state tax deductions per beneficiary for Ohio residents.
New York’s 529 plan, Direct Plan
New York’s plan is available to residents of any state, and it offers low-cost investment options using Vanguard funds, well known for keeping investment costs low. Residents of New York State can receive some hefty state tax deductions, up to $5,000 for single filers and $10,000 for joint filers, making the program an attractive offset for the state’s high taxes.
Wisconsin’s 529 plan, Edvest
Wisconsin’s Edvest program is available to residents of any state, and the 529 plan is another highly regarded investment option. The plan offers age-based options and allows you to take on a more aggressive portfolio where you could earn a higher return. Edvest uses funds from well-known asset managers TIAA-CREF and Vanguard, among others. Wisconsin residents can receive up to $5,000 (for 2024) in state tax deductions per beneficiary.
West Virginia’s plan, Smart 529 WV Direct College Savings Plan
West Virginia’s plan is open to residents of any state — though special tax incentives are available only to West Virginia residents — and its funds offer some of the lowest annual fees among 529 plans. The plan uses funds from Vanguard, a highly regarded low-cost leader, and Invesco, another well-known manager. West Virginia does not cap the tax deduction on filers, giving savers extra incentive to save as much as possible.
California’s plan, ScholarShare 529
California’s ScholarShare 529 is available to residents of any state, and it includes funds from TIAA-CREF, Vanguard, T. Rowe Price, and others. The plan offers a wide variety of age-based funds and other portfolios and provides many passive funds at low costs. However, contributions are not deductible on state income taxes for California residents.
Best brokers for 529 plans
If you want to manage your account through a traditional broker, you can open a plan through one of a few highly reputable online brokers. Here are the top brokers for 529 plans:
Charles Schwab
Charles Schwab’s 529 plan allows anyone in the U.S. to invest, and the plan charges no account service fee or enrollment fee, and it has no account minimum. Schwab’s plan is sponsored by the state of Kansas, so it may be the best fit for Kansans, and non-residents should consider whether their state plan works better for their needs.
Fidelity Investments
Fidelity provides a variety of options, managing four state plans — Arizona, Connecticut, Delaware, and Massachusetts — as well as The UNIQUE College Investing Plan run through New Hampshire. Again, while non-residents may participate in a plan, they may want to carefully consider the tax and other benefits of using their state’s plan.
Merrill Edge
Merrill Edge runs its 529 plan through Maine’s state plan, making it particularly valuable for residents of that state, though U.S. residents can also participate. If you’d prefer, you can have a Merrill advisor make the choices for the account or direct the account yourself.
Pros and cons of 529 plans
While 529 plans do offer many advantages, they still require a trade-off from savers.
A 529 plan can offer tax-deferred growth on your contributions, a tax-free withdrawal of money, and even tax deductions on your state taxes. And these funds can be used to pay for other closely related educational expenses such as room and board, software, and computers.
“529s can also be used in estate planning for grandparents that want to fund their grandchildren’s education, as well as by those looking to create a long-term education family fund,” says Holt.
So a 529 plan offers a lot of flexibility to savers, especially those who can take full advantage. But in exchange for these benefits, you have to endure some drawbacks.
- Less investing flexibility. Because the plans are standardized and administered by the state, you may not be able to invest in exactly what you want. So if you have investing expertise, you may find the investment options less than optimal.
- Limited state tax deductions. Not all states offer a tax deduction for contributions, and so you may simply not receive that benefit.
Also, keep in mind that if you don’t pay state income taxes in a particular state, you won’t receive a state tax deduction for that state, so you should consider this when making your decision.
One of the major drawbacks of 529 plans is the potential taxes and penalties that can accrue if you withdraw the money for non-qualified expenses, even accidentally.
According to Holt, “529 plans are currently the primary method for saving for education expenses.” However, the process of researching and applying for a 529 plan can be overwhelming.
Peter Mansfield, the former chief marketing officer of UNest, suggests that the complexity of selecting a 529 plan and completing the required forms can deter many parents from choosing this savings option.
If you’re considering opening a 529 plan, you can do so directly through a specific state’s plan or through a broker.
Alternatively, you can open separate 529 plans for each child to ensure that each receives the full benefit of the plan without having to worry about timing or investment strategy. This approach may require more management and oversight, but it can simplify the process and ensure that each child’s education expenses are covered.
Ultimately, the best approach will depend on your family’s unique circumstances and financial goals. Consulting with a financial advisor can help you determine the most effective strategy for using 529 plans with multiple children.
Finally, if you use the money for non-qualified expenses, you will owe taxes on the earnings in the account, plus a 10% penalty.
“The tax benefits of a 529 plan make it a compelling investment vehicle for many families,” says Holt. “But it’s important to understand the rules and restrictions of the plan to maximize the tax advantages.”