Wisely investing in 529 Plans can help make this moment possible. Photo: Flickr user Visha Angelova.
Perhaps you've heard that college can be expensive. Some of us Fools would argue that we make it more expensive than it needs to be, but regardless of price, saving for college should be a priority. One popular, tax-advantaged way to do that is through a 529 plan.
But one thing that many people don't know is that you are allowed to invest in almost any state's 529 plan -- even if you don't live in that state. That's important, as not all 529 plans are created equal.
Of course, there are some exceptions to this rule. And usually, when you invest with your home state's 529 plan, there are some tax advantages when you contribute. But if you start saving once your child is born, those tax advantages pale in comparison to the gains you can realize from investing with the very best 529 plans.
So where should you invest your money?
A comprehensive review of 529 plans
When it comes to picking the right plan for you, there are two key factors to keep in mind: fees and returns. Even small increases in fees can eat away at your college savings. Rarely do higher fees justify themselves, though there are a few notable exceptions.
The challenge of finding the right plan is that there's a ton of data to sift through to pick a winning state. Fortunately, Savingforcollege.com recently published a pair of studies on 529 plans that break down the fees and returns of 529 plans nationwide.
Below, I've plotted each state to show where 529 plans have seen the best returns. The data as presented isn't perfect, so there are some important things to note.
The X axis represents the midpoint asset-based fee you pay each year to have your money in a state's 529 plan. For instance, in Missouri, you can choose to invest in plans with fees as low as 0.29% or as high as 0.62%. To create one standard, I've calculated the mid-point for each state -- in Missouri's case, that would be 0.46%.
The Y axis represents the percentile rank for each state's investment returns. This assumes an even investment in all the options that each state offers. For this article, I looked at the three-year returns, as many states have created new investment vehicles that haven't been around for more than that long.
Any state without a track record was not included, and several states that only offer 529 plans to in-state residents were not included as well.
That said, here are the results -- which you can investigate by hovering over any of the data points.
As you can see, every now and again, paying higher fees pays off. This is most notable with Washington, D.C.'s 529 Plans. Even though the average fee is a whopping 1.25% of assets, the state still had the best returns, net of those fees, over the past three years.
But the "state's" plans won't make my top five list, as the fund's managers need to continue that amazing record going year after year -- and although that's possible, there are safer alternatives for parents.
The top five state 529 plans
In reverse order, here are the winners for the country's best 529 plans based on this data:
5. Iowa -- Iowa has one flat fee for all investment options: 0.28%. Not surprisingly, it uses the Vanguard Group and its family of low-cost funds to administer its 529 plans. Taken together, the funds ranked in the 61st percentile.
4. Michigan -- As in Iowa, the fees for investment options in Michigan are extremely low, ranging from 0.20% to 0.30% of assets. The state uses TIAA-CREF to administer its program, and over the last three years, investments in its funds ranked in the 62nd percentile.
3. Illinois -- The Land of Lincoln has slightly higher fees than the rest of the states on this list, ranging from 0.18% all the way up to 0.66%. But the returns -- achieved through Oppenheimer Funds -- have justified those fees, as they have averaged in the 65th percentile over the last three years.
2. Utah -- The first state located outside of the Midwest, Utah consistently ranks as one of the best states for 529 Plans. That's partly because the state handles the investments itself, rather than outsourcing fund management. Basic plan fees range from 0.16% to 0.22%, while customized and age-based options range from 0.20% to 0.62%. Whichever you pick, the returns have been impressive, ranking in the 67th percentile.
1. New York -- The Empire State achieves its top-notch status by keeping things simple and cheap. There are three aged-based options for parents and a handful of static choices, all administered by Vanguard. No matter which plan you choose, the fees are the same: 0.16%. This was, by far, the lowest average threshold for 529 plans in the country. And in the end, leaving more of your money in your account every year pays off: The state's returns rank in the 72nd percentile!
