Section 529 Educational Savings Plans

529 educational savings plans allow you to put aside money for future educational expenses and are sponsored by individual states and are usually tax deductible on your state income tax. You cannot deduct it from your federal tax, but the money does grow tax-deferred and can be withdrawn tax-free if used to pay qualified education expenses. The account owner, usually the parents, retain control of the accounts, which helps in financial-aid calculations. The owner can also change the beneficiary if needed, so if Junior does not go to college you can use the money for the next sibling (or grandchild’s) education by simply changing the beneficiary.

Living in Washington state means I do not have to pay a state income tax, so no tax-deduction at all for me. Most 529 plans allow non-residents to join, but how to choose?
Not only do you have 4 dozen plans to choose from, each plan has any number of investment ‘portfolios’ of which you must choose only 1. Then you have the maintenance fees of the underlying investment (mutual fund fee usually), most plans have their own maintenance fee, plus an annual management fee. I am bewildered by all of the details. It makes picking just about any other investment look easy! Morningstar has the most detailed information about the various 529 plans.

A couple web sites I visited listed the ‘best’ 529 plans available. Some are sold only through brokers, so I eliminated those and looked at only those I can buy directly. Most of sites I read had the Iowa, Ohio, and Utah plans on their ‘best’ list.
I also looked at the Kansas plan since it is managed by Schwab where I have my other investment accounts and if it was close, I could keep things simple.

Plans

According to Morningstar, “The Utah Education Savings Plan continues to set the standard for low costs among 529 plans. Over five other states that offer cheap Vanguard index funds, Utah earns kudos for keeping total costs down by tackling the administrative burden itself — charging only 0.25% — and it doesn’t levy anything at all for choosing its money market option.”

The Schwab plan is definately out. Although the Utah plan looks really good, the $25 annual fee charged to non-residents means that a $5,000 investment gets hit with a management fee equivalent to .50%, putting it in the more expensive category, especially since the Iowa and Ohio plans have no management fee.

Next I will have to look at the actual investment options available in the plans.