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Which 529 Plans Are Best?

Adam Zoll
Laura Pavlenko Lutton

Adam Zoll: Laura, someone who is looking for the highest-quality 529 plans in the country--maybe they live in a state that does not give them a tax break or maybe there is no income tax at all, but they don’t get a tax break for contributing to their state's 529 plan. Therefore the field is open for them. Where should they be looking in terms of some of the best plans in the country?

Laura Lutton: Among our favorite plans, you see a nice variety of both, direct-sold and advisor-sold, and also active and passive management. For example we really like the T. Rowe Price plans that are run out of Alaska and Maryland. That’s an example where they're both direct sold. They've got great underlying investments, reasonable prices on active management, and just a very solid history in the 529 industry. Those would be two of our favorites; they are practically identical. So it doesn’t really matter if you are coming from out of state, like you mentioned, should you choose.

Another one that we really like is the Utah Educational Savings Plan program which is out of Utah and has lot of Vanguard investments. They recently added some indexed options from DFA, and it's another leader in the industry, with low prices and good investments. There has been a lot of innovation we've seen out of Utah over the years. That would be another good choice if you are looking for cream of the crop.

If you are working with a financial advisor. We have two top advisor-sold plans the iShares plan out of Arkansas which is exchange-traded funds indexed. It's straightforward with a lot of good funds that you can use to customize a portfolio with your advisor. Then the other one is College America which is the American Funds plan out of Virginia. It’s the largest plan in the country. It's very nicely priced and has good active management.

Zoll: If you do live in a state that does give you a state income tax deduction, these plans might be enticing, but maybe you should think about the tax deduction before jumping the ship and going to an out-of-state plan, right.

Lutton: Yes, absolutely. It's very important to check those local tax benefits before you decide you are going to abandon them because they can make a material difference. We think about them as part of our research as basis points of performance. It can make a big difference in terms of what the overall performance would be of your 529 investment when you consider those state tax benefits.

Zoll: Even a Bronze-rated plan, maybe even a Neutral-rated plan, if it gives you enough of a tax advantage maybe worth sticking with.

Lutton: Particularly if there are investments in there that are going to work for you and they meet your risk profile. Performance has been reasonable, and that can be a good value.

Zoll: Great. Well, thank you so much for the information.

Lutton: My pleasure.