Choosing the Right 529 Plan: A Guide to Comparing Options Out-of-State

By Andrew

May 05, 2025

In College Savings

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Saving for college can feel overwhelming, especially when navigating the complexities of 529 plans. Many families wonder if they're limited to their own state's 529 plan or if they can explore options nationwide. The good news is that you're not confined by state lines! This guide will walk you through the process of comparing 529 plans out-of-state, helping you make an informed decision that maximizes your college savings.

Understanding 529 Plans and Their Benefits

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. These plans are typically sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code. The primary benefit of a 529 plan is the potential for tax-free growth. Your investment earnings aren't subject to federal income tax, and in many cases, state income tax, as long as the funds are used for qualified education expenses. These expenses include tuition, fees, books, supplies, and even room and board at eligible educational institutions, including colleges, universities, vocational schools, and even some K-12 schools. There are two main types of 529 plans: prepaid tuition plans and education savings plans. Prepaid tuition plans allow you to purchase tuition credits at today's prices for future use at participating colleges, which are usually in-state public institutions. Education savings plans, the more common type, are investment accounts where you can contribute money that grows tax-free. You can then withdraw the funds tax-free to pay for qualified education expenses.

Why Consider Out-of-State 529 Plans?

While your own state's 529 plan might seem like the obvious choice, exploring out-of-state options can be beneficial. Each state offers its own unique 529 plan with varying investment options, fees, and potential tax advantages. By comparing 529 plans out-of-state, you can find the plan that best aligns with your financial goals and risk tolerance. Some out-of-state plans might offer lower fees, a wider range of investment choices, or a better historical performance. In some cases, your state might not offer a state income tax deduction for 529 plan contributions, making an out-of-state plan more appealing. Always remember that your choice isn't restricted to your state's plan; you have the freedom to choose the plan that best fits your needs.

Key Factors to Consider When Comparing 529 Plans Out-of-State

When evaluating 529 plans, it's crucial to consider several key factors to make an informed decision. These factors include investment options, fees, historical performance, state tax benefits (if any), and ease of use. Let's delve into each of these factors:

• Investment Options: Look for a plan that offers a diverse range of investment options to suit your risk tolerance and investment timeline. Options often include age-based portfolios that automatically adjust the asset allocation as your child gets closer to college, as well as static portfolios that allow you to choose your own mix of stocks, bonds, and other investments.
• Fees: Fees can significantly impact your overall returns, so pay close attention to the plan's fee structure. Common fees include annual maintenance fees, management fees (expense ratios), and sometimes enrollment fees. Even seemingly small fees can add up over time, so compare the fees of different plans carefully. According to Savingforcollege.com, a reputable source for 529 plan information, even a 1% difference in fees can result in thousands of dollars in lost savings over the long term.
• Historical Performance: While past performance is not indicative of future results, it can provide insights into how well the plan's investments have performed over time. Look for plans with a consistent track record of strong performance compared to their peers. However, remember to consider the plan's investment strategy and risk level when evaluating performance.
• State Tax Benefits: Some states offer state income tax deductions or credits for contributions to their own 529 plans. However, these benefits are often limited to residents who contribute to the in-state plan. Determine if your state offers any tax benefits for 529 plan contributions and whether those benefits outweigh the potential advantages of an out-of-state plan. Consider consulting with a tax advisor to understand the tax implications of your 529 plan decision.
• Ease of Use: A user-friendly website and responsive customer service can make managing your 529 plan much easier. Look for plans that offer online account access, clear and concise statements, and helpful customer support.

Evaluating Investment Options and Risk Tolerance

Understanding your risk tolerance is crucial when selecting a 529 plan's investment options. If you have a long time horizon (e.g., your child is young), you might be comfortable with a more aggressive investment strategy that includes a higher allocation to stocks, which have the potential for higher returns but also carry more risk. As your child gets closer to college, you might want to shift to a more conservative strategy with a greater allocation to bonds, which are generally less volatile. Age-based portfolios automatically adjust the asset allocation over time, becoming more conservative as your child approaches college age. These portfolios can be a good option for investors who prefer a hands-off approach. If you're comfortable managing your own investments, you can choose a static portfolio that allows you to select your own mix of stocks, bonds, and other investments. Be sure to rebalance your portfolio periodically to maintain your desired asset allocation.

Comparing Fees and Expenses: A Critical Step

Fees and expenses can significantly impact the growth of your 529 plan over time. It's essential to understand the different types of fees and how they can affect your returns. Common fees include annual maintenance fees, which are charged annually to maintain your account; management fees (expense ratios), which are charged by the investment manager to cover the costs of managing the plan's investments; and enrollment fees, which are sometimes charged when you open an account. Be sure to compare the fees of different plans carefully. Even a seemingly small difference in fees can result in a significant difference in your overall savings over the long term. Use online 529 plan comparison tools to help you compare fees and other features of different plans.

Understanding State Tax Advantages and Residency Requirements

One of the most important things to know is that many states offer tax advantages to residents who contribute to their own state's 529 plan. These advantages can include state income tax deductions or credits for contributions. However, these benefits are usually limited to contributions made to the in-state plan. Before choosing an out-of-state plan, carefully consider whether you're giving up valuable state tax benefits. Also, some states may have residency requirements for certain 529 plan benefits. For instance, some states may require you to be a resident to be eligible for scholarships or grant programs funded by the 529 plan. Be sure to check the specific rules and regulations of your state and the state sponsoring the 529 plan you're considering.

How to Open and Manage an Out-of-State 529 Plan

Opening an out-of-state 529 plan is generally a straightforward process. You can typically enroll online or by mail. You'll need to provide information about yourself and your beneficiary (the student for whom you're saving), such as names, addresses, dates of birth, and Social Security numbers. You'll also need to choose your investment options and determine how much you want to contribute. Once your account is open, you can manage it online, make contributions, and track your investment performance. Be sure to keep your account information up-to-date and review your investment allocation periodically to ensure it still aligns with your goals and risk tolerance.

Mistakes to Avoid When Selecting a 529 Plan

Choosing the wrong 529 plan can have negative consequences for your college savings goals. Here are some common mistakes to avoid:

• Not comparing plans: Don't assume that your own state's plan is automatically the best choice. Take the time to compare plans from different states to find the one that best meets your needs.
• Focusing solely on past performance: While past performance can be helpful, it's not the only factor to consider. Look at the plan's investment strategy, fees, and other features as well.
• Ignoring fees: Fees can eat into your returns over time, so pay close attention to the plan's fee structure.
• Not understanding your risk tolerance: Choose investment options that align with your risk tolerance and time horizon. Don't invest too aggressively if you're not comfortable with the potential for losses.
• Not reviewing your account regularly: Review your account periodically to ensure your investment allocation still aligns with your goals and risk tolerance. Rebalance your portfolio as needed.
• Withdrawing funds for non-qualified expenses: Withdrawing funds for non-qualified expenses can result in taxes and penalties, negating the tax benefits of the 529 plan.

Resources for Further Research and Comparison

Several resources can help you research and compare 529 plans. Savingforcollege.com is a comprehensive website that provides information about 529 plans, including state-by-state comparisons, fee calculators, and performance data. The College Savings Plans Network (CSPN) is a non-profit organization that promotes college savings and provides information about 529 plans. Your state's 529 plan website is another valuable resource for information about the in-state plan. You can also consult with a financial advisor to get personalized advice on choosing the right 529 plan for your needs. Websites like Kiplinger.com and Forbes.com often have articles comparing different 529 plans.

Making the Right Choice for Your Family

Comparing 529 plans out-of-state can seem daunting, but by following these steps and considering the key factors outlined in this guide, you can make an informed decision that sets your child up for future success. Remember to carefully evaluate investment options, fees, potential tax advantages, and ease of use. Don't be afraid to explore options beyond your own state's plan. By taking the time to research and compare, you can find the 529 plan that best aligns with your financial goals and helps you maximize your college savings. Starting early and contributing consistently can make a significant difference in your child's ability to afford college.