Entering the Complex World of 529 Plans

Those looking to invest for their children's college educations have a number of options - with the most popular of these being 529 Plans. Similar to Roth IRAs, investment gains under 529 Plans are not subject federal taxes upon withdrawal as long as they are used for educational purposes. However, setting up a 529 account can be much more complicated than setting up a Roth IRA since there are so many more options - each state has its own 529 Plan with its own investment options and underlying expenses. Anyone can open a 529 Plan in any state and use the proceeds to pay for college anywhere in the United States.

If you do decide to look outside of your home state for a 529 plan (which may make sense depending upon the state in which you reside), the analysis can be overwhelming at first glance. However, the decision boils down to a few major points. First, make sure that you are comfortable investment options offered, noting that they can be very different between plans. For example, one state's "aggressive growth" portfolio can include an index of the entire stock market while another may consist mostly of tech stocks. Next, consider the annual fees of each plan, as well as the expense ratio, as these expenses can also range greatly between plans. Finally, note that many states offer a tax break if you invest in your own in-state program. Consider whether this tax break makes up for any deficiencies in fees, expenses, or investment offerings that may exist in your state's program.

One option to consider for your 529 plan is the Vanguard 529 College Savings Plan offered through the state of Nevada. Vanguard is known for its lower-cost investment options such as low and mid-cap indices. With no annual fee on an initial investment of $3,000 and a total expense ratio ranging between 0.60%-0.65, as compared to other plans. Assuming equal rates of return on your investment, you can improve your overall return by 11% (or over $1000 on your initial investment) after 18 years with the Vanguard program because of the substantially lower fees.

As any parent can attest, it's hard to find the extra money necessary to start saving for a child's future college costs. It is important that parents investigate all of their options before deciding where to invest for their child's college education. In making this decision, expenses, investment options, and tax considerations must be contemplated when determining where to open a 529 College Savings account.