Finding the best 529 college-savings plan is easier than you think. Here's what matters most.

By Beth Pinsker

Simplify your decision-making so you can focus on saving

If you're shopping for the best 529 college savings plan, you may be overthinking the process. The choice should be simple and quick, so that there are no impediments to saving.

The goal, after all, is to set aside money for college in an account where the growth will be tax-free if you use it for educational purposes. What matters most is getting money into that account - whether it is set up by parents, grandparents or other family members - so that you won't need to borrow as much when the tuition bill comes due.

It's similar to the argument that there's no bad pizza: There really isn't a bad 529 plan, and there's no reason to fuss over the difference of a fraction of a percentage point in return between plans. The most important thing is to just pick one and start saving.

"I'm with you 100%. Fundamentally, this is a very positive behavior that we're trying to encourage, and I've never heard of anyone regretting setting up a 529," said Jordan Lee, the chief executive of Saving for College, which just released a "best 529 plan" list. "The main impact of this account is that it's a dedicated place to save, with a bunch of advantages, that is evolving to cover more types of costs. It's a great thing to do even if you go with a plan that's not quite as strong as another plan."

Pick your state plan

For most families in the U.S., there really isn't much of a decision to make, because there's a no-brainer state tax deduction for contributions to the 529 plan offered by the state where they live. That applies in more than 30 states and the District of Columbia.

In this way, 529 plans are more like your workplace 401(k) plan and less like a high-yield savings account, for which you have to shop around to find the best rates. Most of us don't have a choice about the retirement plan we're offered at work - we can only choose our investments within the plan. For people living in places where there's a state tax deduction for 529 contributions, you just pick that plan and move on.

'I've never heard of anyone regretting setting up 529.'Jordan Lee, Saving For College

"I would take that tax deduction," said Marti Awad, a financial adviser in Colorado who sits on the board of her state's 529 plan.

Nine states, including Colorado, offer an in-state deduction for contributions to any state's plan, but you may still want to stick with your own state's plan, because some offer starter contributions at birth or other perks and bonuses over time.

Shop around

If you live in a state that doesn't have state tax, like Texas or Florida, or one that doesn't offer a state tax deduction, like California, you're in a shopping scenario, and you'll have to cut through a certain amount of noise to get to a decision.

The first place the financial industry makes this harder than necessary to understand is that each state in the U.S. offers a 529 saving plan, but these are not restricted to the residents of that state. All the state designation means is that there's a board of state officials or other people, like Awad, running the investment options behind the scenes.

Another bit that makes little sense to the average family is that states also typically offer two kinds of 529 plans - one sold directly to consumers and the other sold via investment advisers on commission.

There are also different kinds of 529 plans for special circumstances, like prepaid-tuition plans, which are marketed nationally. The Private College 529 Plan is one that allows families to buy into today's tuition rate at over 300 private institutions. Many people who use one roll over funds from a traditional 529 at some point - the average age of the beneficiary is 9 - as the student's plans start to solidify.

"As they get close to college age, they look at our list and say, my child might be going to those, so they lock in at today's tuition to protect against tuition inflation," said Jonathan Sparling, the company's director of strategic partnerships.

Awad suggested that most families can make things easier by just getting a traditional 529 plan directly from the state sponsors. Opening one of these takes mere minutes on a website in most cases, and you're on your way to saving. Once you see how easy it is, you'll realize you don't need help setting it up.

Is there a best plan?

When it comes to picking a state plan, of course you want the best plan possible. But what does that really mean? Saving for College rated its plans according to four criteria for this year's list: performance (net of cost), ease of use, savings success and program delivery.

Nine direct-sold plans made it to the "top of the class" ranking with a rating of 4.5 out of 5, including those from Maryland, Alaska, West Virginia and California. The lowest plans rated - those from Vermont, Washington and Mississippi - got a 3.

"What's notable is that in the past, we did have some plans get a 5 [rating], but we don't have any with the new methodology. So there's room to grow," said Lee.

Of all these criteria, fees matter most, but the gradations involved here are not actually that steep, and even a plan with a rating of 3 is still listed as "good" - and the overall concept of tax-free savings growth for college is still excellent. If you live in Vermont, for instance, which has robust tax deductions for state contributions, the math would likely still be in your favor to choose the state plan rather than picking a plan from the top of the "best" list.

"If there's a tax deduction in your state, or if there's any other advantage, I wouldn't worry too much about the differences," said Awad.

More Fix My Portfolio

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-Beth Pinsker

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10-05-24 0800ET

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