How Do I Choose a 529?
A three-step solution for selecting the best college savings plan.
Choosing a 529 plan can seem like a complicated task. Plans are administered at the state level, so they vary by state in terms of asset allocation, investment quality, and fees. Another consideration is whether or not your state offers an income tax benefit for contributing. Lastly, many states allow out-of-state residents to invest in their plans, which opens a lot more options for college savers. And while having more choices is good, evaluating all those options can prove time-consuming and difficult.
Morningstar's research, tools, and insights can help you narrow your search down in three easy steps.
Step 1: Evaluate your state tax benefit.
State income tax benefits are a big consideration when determining whether you should stay in-state or venture out-of-state to find a 529 plan.
We might rate your state’s 529 plan(s) poorly, but if your contributions (money put into the account) earn a state tax break that you would forego by venturing out-of-state, in most cases you will benefit from staying. Here's a framework for thinking it through:
We group states into five categories. The first two allow state tax breaks on your 529 contributions. The remaining three provide no tax incentive for staying in-state.
If you live in a state that offers a state income tax benefit, either a deduction or a credit, our research makes a strong argument to stay in-state. Tax breaks offset all or most of a cheap in-state plan's fee, barring one exception.
If your state falls into the latter three categories described above--tax parity, no tax benefit, and no income tax--there's no benefit to staying in state. College savers in these states can search for the best plan, whether in-state or out-of-state.
Step 2: Determine if you want an age-based or static portfolio.
Once you decide whether or not to stay in-state, it's time to make some investment decisions. Decide which of the two broad 529 investment options you prefer: age-based or static portfolios.
Age-based portfolios, the most popular choice among investors, automatically shift from risky, higher-earning securities (stocks) to less-risky investments (bonds) as your child nears college. This helps protect your money from being wiped out in a market downturn shortly before you'll need to pay tuition bills. If you choose an age-based portfolio, understand how they vary across plans.
You'll also want to choose the flavor of age-based plan you want. With some, you can fine-tune the stock and bond exposure by choosing an aggressive (more equity) or conservative (less equity) track. Others let you choose between an active or passive portfolio.
Static portfolios let you choose what to invest in. The holdings stay the same over time unless you adjust them, letting you cook your own college-savings meal with ingredients from a preset investment menu. This includes stock funds, bond funds, and balanced funds, which contain a set proportion of stocks and bonds.
Static portfolios are best-suited for those who want to deviate from an age-based portfolio and have the time and knowledge to tinker with the portfolio over time.
Step 3: Use Morningstar's research to compare plans.
Morningstar rates 529 plans to help you choose the best option whether you're evaluating plans across states or within one state.
We award plans that we like with Morningstar Analyst Ratings of Bronze, Silver, or Gold, with Gold-rated plans having our highest conviction. We evaluate funds across five pillars: People, Process, Performance, Price, and Parent. Here are some of the most important considerations across pillars:
Some other features you might want to consider are whether a plan offers aggressive, moderate, and conservative age-based portfolio tracks, and whether it is available through direct-sold as well as advisor-sold channels.