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A 529 plan is a more flexible investing option post-tax reform. You can now use this type of tax-advantaged account to save for K-12 educational tuition as well as its traditional use, for college expenses.
Not all 529 plans are created equal, however. In fact, Morningstar’s latest annual ratings of 529 plans include more downgrades than upgrades.
For the ratings, the investment research firm analyzed 62 of the largest 529 plans in the country.
The most common rating it gave is “Neutral.” The 26 plans that received a neutral rating are “adequate but have room for improvement,” Morningstar reports. Another five plans earned a “Negative” rating, meaning they have at least one major flaw.
The best 529 plans
The other half of the 529 plans that Morningstar analyzed earned positive ratings — either “Gold,” “Silver” or “Bronze.”
Still, only four plans earned the highest positive rating — and they are the same four plans that earned the rating last year. These Gold-rated plans, and the states that sponsor them, are:
- Bright Start College Savings — Illinois
- Invest529 — Virginia
- Vanguard 529 College Savings — Nevada
- my529 (formerly known as Utah Educational Savings Plan) — Utah
“These plans stood out for their low costs, strong stewardship, and exceptional investment options,” Morningstar notes.
Is a 529 plan best for you?
Tax savings is a key advantage of 529 plans.
They are like Roth IRAs and Roth 401(k)s accounts in that money contributed to 529 plans is taxed only on the front end. So, contributions are not tax-deductible, but earnings grow tax-free, and no tax is due on qualified withdrawals.
Morningstar found that tax savings are not the biggest advantage to 529 plans, however. The firm explains:
“The largest single benefit of 529 plans comes from moving existing savings into an investment account — and earning higher returns in exchange for additional risk. … Many families use savings and checking accounts instead of investment accounts to hold their college savings, and 529s simply encourage families to invest those funds.”
Of course, any type of investment account would enable savers to invest the money they’re socking away in the account. For example, a Roth IRA is another option for folks who want to invest the money they’re saving for college expenses.
Investing college savings isn’t for everyone, though. As with any type of investing, it entails greater possible reward but also greater risk.
You may be better off with another type of savings account in which you can stash college cash. Money Talks News founder Stacy Johnson details the pros and cons of them as well as Roth IRAs and 529 plans in “Ask Stacy — What’s the Best Way to Save for My Kid’s College?”
As Stacy concludes that article:
“When it comes to which of these options is best, there’s no correct answer. Each has advantages and drawbacks. What’s best depends on factors including where you live, your income and your ability to save. Of course, you’re not confined to just one approach.”
Do you have a preferred method for saving or investing money for future educational expenses? Let us know why by commenting below or over on our Facebook page.