05 Nov How can I choose the best 529 plan for my grandchild?

Q. My son is having a baby. I want to start a college fund and I think a 529 plan is the best way. How can I choose the best one?
— Grandparent

A. Congratulations! Your soon-to-be grandchild is lucky to have you as a grandparent.

The average cost of four years at a public, in-state college today is $90,760. For a private school, it’s $206,760.

If you look 18 years to the future and consider inflation, the cost jumps to $218,425 for public and $497,593 for private, assuming a 5% growth rate in tuition and room and board pricing, said Jeanne Kane, a certified financial planner with JFL Total Wealth Management in Boonton.

She said it’s less expensive to finance college with savings than it is with loans, and she called 529 plans great, tax-advantaged savings vehicles.

“The investment grows tax deferred, and growth is tax-free if the funds are used to pay for ‘qualified education expenses’ such as tuition, fees, books, supplies, and room and board costs,” Kane said.

529s are offered by each state but you’re not limited to investing in your state’s plan. You can invest in any of them, she said.

As a grandparent, there are a few items to consider.

As the owner of the plan, you maintain control and get to select a beneficiary of the 529, she said.

“If the grandchild doesn’t want to go to college or if your grandchild gets a scholarship, you can change the beneficiary to another family member,” Kane said. “If you ever need the money in the future, you can take a distribution but will pay a 10% penalty and pay tax on the growth.”

You also don’t have to own the account, she said. Instead, you can contribute one that your son may own, she said.

In the past, student funding that came from a 529 owned by a grandparent could impact a student’s eligibility for need based financial aid. That’s because this cash support counted as student income, she said.

Changes to the Free Application for Federal Student Aid (FASFA), a form that all students complete that determines how much, if any, financial aid they receive, will eliminate questions related to cash support for the 2024-2025 school year, Kane said.

Given that you can start an account with any state’s plan, you have a lot to choose from.

Kane said you should look for a plan with low fees, noting that large financial institutions known for offering low cost investments such as Fidelity, Charles Schwab, or Vanguard all manage 529 plans.

“The lower the fee, the higher the net return if you’re comparing like investments, particularly if the options are invested in index funds,” she said. “Look for a plan that offers the investment options that will meet your goals and your level of involvement.”

529 plans offer so-called age-based investment options, which might be attractive if you don’t want to have to monitor the investments regularly.

“These funds automatically rebalance and become more conservative over time,” she said. “A newborn will be more aggressively invested than a 17-year-old.

These are similar to target date funds offered in 401(k) plans.”

If you prefer being more involved in investment decisions, you should choose a plan that offers a variety of aggressive, moderate and conservative fund options available to you, she said.

“As with any investment, you’ll want to compare long term investment performance across the various plans you’re considering,” she said.

Some states also give you a state income tax deduction if you invest in their 529 plan while there are a handful that will give you a deduction for investing in any state’s plan.

“Unfortunately, New Jersey isn’t one of them,” Kane said.

New Jersey’s plan, NJBest, does offer a tax-free scholarship for New Jersey students who attend school in the state, with a maximum of $3,000. There is also a match of up to $750 for new accounts. But you don’t yet know where your grandchild will attend school, so that probably shouldn’t factor too much into your decision-making.

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This story was originally published on Nov. 5, 2021.

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.