Which 529 Plan should I choose?

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Q. How can I choose the best 529 Plan? I don’t know where my kids will decide to go, so I’m not sure if the New Jersey plan is the best choice?
— Wanting to save

A. A 529 Plan is considered to be the best way to save for college because of the tax benefits, large contribution levels and the flexibility of the plans.

529 plans can be used to cover qualified higher education expenses at accredited universities and colleges all across the United States and even some schools in other countries, said Brian Smalley, a certified financial planner with RegentAtlantic Capital in Morristown.

“This flexibility allows you to broaden your search for the best 529 plan available beyond the plan(s) offered in your home state,” Smalley said.

That being said, taking a look at the 529 plan(s) offered by your home state is a good place to start.

Some states — but not New Jersey — offer a state income tax deduction for contributions.

That removes a big potential plus for investing in New Jersey’s plan.

It offers something else instead.

“The NJ Best 529 College Savings Plan provides a potential benefit of up to $1,500 tax-free scholarship to students that attend New Jersey colleges and universities,” said Jody D’Agostini, a certified financial planner with AXA Advisors/The Falcon Financial Group in Morristown. “It allows you to open an account with as little as $25 and will accept contributions for any beneficiary up to $305,000.”

Of course, the scholarship benefit will only help if your children end up in New Jersey.

That’s why it makes sense to review plans from other states, too.

Smalley said your deciding factors should be costs and diversification.

In terms of costs, an easy way to keep them down is to avoid advisor-sold 529 plans, he said.

“Advisor-sold 529 plans’ costs typically include brokerage commissions and higher mutual fund expenses compared to the alternative direct-sold 529 plans,” Smalley said. “Direct-sold 529 plans offer a basic set of investments — typically passive investments such as index funds — with in an age-based investment glide path, which manages the investment decision of how to allocate the funds in the 529 account between stocks, bonds, and cash for you.”

If you choose an age-based option, as your child gets older, the 529 account allocation will change and will invest in less stocks and more in cash and bonds in order to preserve the account’s value for the college years, Smalley said. This automatic process eliminates the need for a broker to manage the account for you.

D’Agostini also recommends using an age-based portfolio.

Within direct-sold 529 plans, Smalley said it’s important to identify plans that offer a variety of investment options such as mutual funds that invest in cash, bonds, and U.S. and international stocks, Smalley said.

“Having different investments that invest in different parts of the global markets allow you to spread your risk out and actually increase your return over longer periods of time,” he said. “If a 529 plan only offers you a few investment options, I would pass on it in favor of one that offers a wider mix of options.”

D’Agostini said you should also look the plans performance data on a historic perspective to make certain the managers have a good track record for performance over a one-, three-, five- and 10-year time horizon.

Then look at fees and expenses, which ultimately affect your return.

To do this, Smalley recommends using a web site such as SavingForCollege.com, which allows you to do a side-by-side comparison of the costs of these plans — important costs to compare are average mutual fund expenses and administrative fees — and gives you access to the 529 plan web sites in order to compare investment options.

From there, you should be able to narrow down the 529 plans to a small list of candidates.

“Your decision on which 529 plan to choose from that list may end up being based on smaller factors such as the user-friendliness of the plan’s web site or your familiarity with the mutual fund family being used by the plan,” Smalley said. “But by basing your decision on cost and diversification, you can have confidence that you have selected a plan that will work for you as you save for college both by keeping costs low and spreading the investment risks over a variety of investment options.”

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This story was first posted in December 2015.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.