Since Congress supercharged 529 plans in 2001, they've become the predominant tax-advantaged college savings program. Administered by nearly all of the 50 states (and the District of Columbia), these plans typically invest contibutions in a combination of stock, bond, and money market mutual funds. The asset allocations are often designed to grow when there's many years remaining until beginning college, and preserve your savings when it's time to write the tuition checks.
529 college savings plans have gotten cheaper in many states, according to recent reports from Savingforcollege.com. 529 plans in New Jersey, Vermont, Virginia, and Pennsylvania are among the plans to recently reduce their management fees—the costs that administrators charge to manage the funds. These are the fees which can include the costs related to recordkeeping, customer service, and mailing statements to savers. They, and seven other states, have reduced their management fees from 0.03 to 0.20 percent annually—resulting in a savings of as much as $20 for every $10,000 invested every year.
But management fees aren't the only costs 529 savers bear—there's also the costs of the funds. Most 529 plans will invest in more then one mutual fund, and there will be an additional cost to investing in each of the funds in the plan. Funds with higher expense ratios, over time, may result in lower returns.
See our Parents’ guide to saving for college
Low management and fund expenses are only part of the 529 savings picture. For many college savers, tax savings will be at least as important as the costs and the type of investment. For those living in high-tax states, that usually means choosing a 529 plan within one's own state. Any earnings from 529 plans will be free from federal taxes, as long as the funds are used for a qualified educational expense. But in most cases, you'll only receive the benefit of a state tax deduction by investing in a 529 plan in your own state. But if your state taxes are minimal or nonexistent, then you have the advantage of shopping for a low management cost, low expense 529 plan offered from nearly any state in the Union (and the District of Columbia).
—Chris Horymski
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