Choosing a 529 Plan

||  This article is part of a series on the 529 Education Savings Plan  ||

This article provides a brief overview of the history and utility of the 529 Education Savings Plan, followed by a discussion of how to choose the best 529 Plan for your state of residency and investment time horizon.  It includes links to resources for further researching your plan options and a simple calculator for making the decision between home-state tax-incentivized and out-of-state low-cost plans.


529 Education Savings Plans are tax-advantaged investment plans designed to help investors save for future higher education expenses (1).  Much like a Roth IRA, you invest money you've already paid income tax on and the money grows - and can be withdrawn - tax-free, as long as it's used to pay for qualified higher education expenses (2).  Qualified expenses include tuition, fees, books and equipment required for enrollment in an eligible institution (3), as well as room and board up to the total value stated by the university for federal financial aid purposes.  The Plan Owner may freely change the 529 Plan's beneficiary to any of the original beneficiary's family members, which provides welcome flexibility if you don't know whether the beneficiary will go to college or how much it might cost.  You can even open a 529 Plan for yourself, to use for your own educational expenses or to transfer to your (future) kids.

Legislative History

The 529 Plan's legislative history (4,5) began in Section 1806 - "Qualified State Tuition Programs" in the Small Business Job Protection Act of 1996 (6), but was amended soon after in the Taxpayer Relief Act of 1997 (7) and evolved into its present form with the passage of George W. Bush's Economic Growth and Tax Relief Reconciliation Act of 2001 (8).  Since 2001, it has largely supplanted the Coverdell Education Savings Account (9) and Universal Transfer/Gift to Minors Act (UTMA/UGMA) (10) as the most tax-efficient way to transfer money to someone else to help pay for higher education - undergraduate, graduate, business, law, medical, professional, and in some cases even international schools!

Choosing A Plan

As I mentioned in my previous article on 529 Education Savings Plans, there are many plan options to choose from.  Each state sponsors at least one 529 Plan, and some states have as many as five(!).  The state sponsors the plan and pays an investment firm, such as Vanguard, Fidelity, or TIAA-CREF, to administer it.  Investors are free to open one or more 529 Plans in any states they would like, though some states attempt to entice their residents with tax breaks on home-state plan contributions.  Which state sponsors your 529 Plan has no effect on where the beneficiary may go to school and use those funds.

Given all of this flexibility, how should you choose a plan?  Two factors predominate:
  1. State Tax Incentives
  2. Investment Expenses

Situation: No Tax Incentive

First, let's consider the easier situation where there is no tax incentive to choose your home state's plan.  This may be the case for a variety of reasons:

Five states offer state tax deductions for residents who contribute to any state's 529 Plan:
Arizona, Kansas, Maine, Missouri, Pennsylvania

Nine states don't have a state income tax:
Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming

Seven states don't offer any tax breaks for contribution to the state's 529 Plan:
California, Delaware, Hawaii, Kentucky, Massachusetts, Minnesota, New Jersey

These 21 states represent just over 50% of the population of the United States (159 million of 309 million (15)), so there's a good chance you live in a state where tax incentives are not the deciding factor.  In this case, you should pick the plan with the best investments and the lowest expenses.

To compare the plans I recommend below and to do your own research on the tax incentives and investment options in each plan, check out these resources:

    After poring over these plan details, I can narrow it down for you.  Check out the plans sponsored by:
    OhioNew YorkUtahIllinoisIowaKansas, and Nevada

    These plans all offer portfolios that hold Vanguard's low-cost index mutual funds.  The annual expenses on these portfolios are higher than they would be if you were purchasing Vanguard's funds directly, but they're significantly cheaper than the actively-managed fund portfolios offered by other states and it's a small price to pay for the capital gains taxes you'll save:

    Ohio ----------- M★ --- Bogle --- Official
    New York ---- M★ --- Bogle --- Official
    Utah ----------- M★ --- Bogle --- Official
    Illinois -------- M★ --- Bogle --- Official
    Iowa ----------- M★ --- Bogle --- Official
    Kansas ------- M★ --- Bogle --- Official
    Nevada ------- M★ --- Bogle --- Official

    Can't choose and too lazy to do a full analysis?  Choose... Utah!  The fund selection is varied, and you can customize a portfolio to hold these funds in any proportion:

    Vanguard Fund ------- Expense Ratio
    Total Stock Market ----- 0.22%
    S&P500 -------------------- 0.22%
    Mid-Cap ------------------- 0.26%
    Small-Cap ----------------- 0.26%
    Total International ------- 0.30%
    Developed Markets ----- 0.28%
    Total Bond Market ------ 0.25%
    Short-Term ---------------- 0.27%

    Situation: State Tax Incentive

    If your home state offers you a tax deduction on your 529 Plan contributions, you should first consider enrolling in your home state's plan:

    The remaining twenty-nine states (and the District of Columbia) offer state tax deductions for residents who contribute to their home state's 529 Plan:
    Alabama, Arkansas, Colorado, Connecticut, District of Columbia, Georgia, Idaho, Illinois, Indiana, Iowa, Louisiana, Maryland, Michigan, Mississippi, Montana, Nebraska, New Mexico, New York, North Carolina (some filers), North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Utah, Vermont, Virginia, West Virginia, Wisconsin

    Some of these states offer tax credits while others offer deductions.  Some states offer a degree of matching contributions for low-income savers, while others phase out tax incentives for high-income savers.  Check out the Peterson's article on 529 tax incentives and read your state plan's official site and entry in the Bogleheads wiki to make sure you have all of the details.

    The states listed in italics have a state tax recapture provision that prevents you from investing money in your state's plan, rolling that money over to another state's plan, and keeping your tax break; the remaining states do not currently have recapture tax, so this rollover maneuver could be performed.  Watch out, though - tax laws change regularly!

    In some cases, your state may offer a tax break but the available investments may be relatively expensive, with Expense Ratios exceeding 0.50%.  Use this calculator to compare your total plan savings between your state's plan and a low-cost plan like those described in the preceding section.


    Despite the many options, the objective of 529 Plan selection is straightforward: choose the plan that will, at the end of the day, leave the greatest percentage of your money to grow with the markets in a low-cost index fund.  With tax incentives and expense ratios in mind, the selection process becomes fairly straightforward.  For the over half of potential investors who are not motivated by tax breaks, the choice is even easier - the Utah plan will almost certainly suffice.

    Questions?  Comments?  Leave them below.

    (1) IRS: 529 Plan Q&A - http://www.irs.gov/uac/529-Plans:-Questions-and-Answers
    (2) IRS: Qualified Tuition Program details - http://www.irs.gov/publications/p970/ch08.html
    (3) Eligible school search - https://fafsa.ed.gov/FAFSA/app/schoolSearch
    (4) 26 USC 529 Full Text - http://www.gpo.gov/fdsys/pkg/USCODE-2011-title26/html/USCODE-2011-title26-subtitleA-chap1-subchapF-partVIII-sec529.htm
    (5) 26 USC 529 Legislative History - http://www.law.cornell.edu/uscode/text/26/529?quicktabs_8=2#quicktabs-8
    (6) Small Business Job Protection Act of 1996 - http://hdl.loc.gov/loc.uscongress/legislation.104hr3448
    (7) Taxpayer Relief Act of 1997 - http://thomas.loc.gov/cgi-bin/bdquery/z?d105:H.R.2014:
    (8) EGTRRA 2001 - http://thomas.loc.gov/cgi-bin/bdquery/z?d107:H.R.1836:
    (9) Coverdell Education Savings Account - http://www.irs.gov/uac/Coverdell-Education-Savings-Accounts
    (10) UTMA/UGMA - http://www.finaid.org/savings/ugma.phtml
    (11) Morningstar: 529 Plan Reviews - http://529.morningstar.com/state-map.action
    (12) Bogleheads: 529 Plans - http://www.bogleheads.org/wiki/529_Plans
    (13) Peterson's: State Tax Breaks for 529 Plans - http://www.petersons.com/college-search/529-plan-tax-breaks.aspx
    (14) Kiplinger: Best 529 College-Savings Plans - http://www.kiplinger.com/article/college/T014-C000-S001-best-529-college-savings-plans.html
    (15) Wolfram Alpha calculator - http://www.wolframalpha.com