Sure, most 529 college-savings plans took a beating in the bear market, but they are still a great way to save for college. That's because the earnings are tax-free if they are used to pay qualified college expenses, such as tuition, books, school fees, and room and board. And two-thirds of states sweeten the deal by offering a tax deduction or credit for contributions.
If you're new to 529 plans -- or if you want to jump to another plan -- use this guide to pick the best plan for you. Uncle Sam took pity on families having second thoughts about their college savings this year and altered the rules to allow two portfolio changes in 2009. (You always have the option of changing plans once every 12 months by rolling the money into another state's 529 account.)
Navigate the choices. Most states offer two types of college-savings plans: a low-cost plan sold directly by the state and higher-cost plans sold by brokers. Forty-eight states and the District of Columbia offer direct-sold 529 plans. Tennessee closed its plan and endorses the Georgia plan, Wyoming has adopted the Colorado plan as its own and Washington offers only a prepaid plan.
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Buy a 529 directly from your state if the plan offers credits or deductions on your state tax return. About 40% of 529 investors buy broker-sold plans, which carry sales charges and offer slightly more investment options. But you can find an adequate investment menu in direct-sold plans. Plus, lower expenses mean that more of your money will go toward building your college fund.
The state tax break will trump lower fees in an out-of-state program. Thirty-four states and the District of Columbia offer tax incentives. Some states allow you to deduct your entire 529 contribution from your state income tax; others limit the deduction to a few thousand dollars or less. Several states let you deduct excess contributions in future years, but they differ on how much you can carry over. A few states place income restrictions on who can benefit from deductions for 529 contributions. Check your state's tax rules before you make a decision.
TOP FIVE PLANS
If your state doesn't offer a tax break -- or if you live in Arizona, Kansas, Maine, Missouri or Pennsylvania, which give a tax break no matter where you invest -- consider stashing your college savings in one of the following plans:
Best for low fees. If low investment costs are your primary concern, take a look at the Vanguard index-fund portfolios available in the direct-sold version of the Illinois Bright Start College Savings Program. Costs in these index portfolios are rock-bottom, with expense ratios ranging from 0.20% to 0.22%. But skip the actively managed options run by Oppenheimer, which were some of worst performers of 2008. (The plan also levies a $10 fee for each Vanguard portfolio selected.)
Best for overall investment mix. The prefab portfolios offered by 529 plans are only as good as their underlying mutual funds. That's why we like Alaska's T. Rowe Price College Savings Plan. The plan's most expensive option costs just 0.96% annually.
Best for conservative investors. The Michigan Education Savings Program, run by TIAA-CREF, is ideal for investors who shy away from putting their college savings in the stock market. The plan has a savings option that guarantees principal and a minimum annual interest rate based on a Treasury note index. That option doesn't charge an annual fee. The plan also offers portfolios of TIAA-CREF mutual funds that are tilted more toward bond funds than most other 529-plan offerings. Those options cost a very low flat fee of 0.45% annually.
Best for fund choices. For do-it-yourself investors who want to build their own portfolio, the College Savings Plan of Nebraska offers a selection of 20 funds from American Century, Fidelity, Pimco and Vanguard. The wider assortment does come with higher fees. The most expensive fund option costs 1.64% annually, and there's a $20-per-year maintenance fee for all accounts.
Best adviser-sold plan. If you feel more comfortable using an adviser, ask about the Virginia CollegeAmerica plan. You'll pay more in fees than you would by buying a plan directly, but your adviser can craft a solid portfolio with 22 top-notch funds from American Funds.
STATE-BY-STATE GUIDE
Check out our state-by-state recommendations. Click on the letter that corresponds to your state.
A | C | D | F | G | H | I | K | L | M | N | O | P | R | S | T | U | V | W
Higher Education 529 Fund (direct-sold version)
Why? This plan, sold directly through the state, lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Alabama offers a state-tax deduction of up to $5,000 if you contribute to the state's 529.
Go with one of Kiplinger's top five 529 plans.
Why? Alaska doesn't have a state personal-income tax. Because there's no tax break for contributions to an in-state 529 plan, you can choose any plan you wish. We like the University of Alaska College Savings Plan if your kid will attend school in state. It is identical to Alaska's T. Rowe Price College Savings Plan, except the University of Alaska College Savings Plan offers the ACT portfolio option, which guarantees protection from tuition inflation if the proceeds are used to attend the University of Alaska.
Go with one of Kiplinger's top five 529 plans.
Why? Arizona residents can invest in any state's 529 plan and qualify for a state income-tax deduction. You can deduct up to $750 per individual taxpayer (up to $1,500 for joint filers) each year.
GIFT College Investing Plan
Why? If you contribute to the Arkansas 529 plan, you can take a state income-tax deduction of up to $5,000 per individual (up to $10,000 for joint filers) each year. The tax break trumps lower fees in an out-of-state 529.
Go with one of Kiplinger's top five 529 plans.
Why? California doesn't offer a state income-tax deduction for contributions to an in-state 529 plan, so pick the plan that's best for you.
Direct Portfolio College Savings Plan
Why? This plan, sold directly through the state, lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to an in-state 529 plan can fully deduct contributions up to their adjusted gross income from their state income tax. The tax break trumps lower fees in an out-of-state 529.
Connecticut Higher Education Trust
Why? Residents who contribute to the Connecticut 529 plan can deduct up to $5,000 per individual (up to $10,000 for joint filers) from their state income tax. The tax break trumps lower fees in an out-of-state 529.
Go with one of Kiplinger's top five 529 plans.
Why? Delaware doesn't offer a state income-tax deduction for contributions to an in-state 529 plan, so pick the plan that's best for you.
D.C. 529 College Savings Program (direct-sold version)
Why? The direct-sold District of Columbia plan lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to a D.C. 529 plan are eligible to deduct up to $4,000 from their D.C. income taxes. Those who contribute more than that can deduct the excess in future years. The tax break trumps lower fees in an out-of-state 529.
Go with one of Kiplinger's top five 529 plans.
Why? Florida doesn't have a state personal-income tax. No tax break for contributions to an in-state 529 plan means you can choose any plan you like.
Georgia's Path2College 529 Plan
Why? This plan, sold directly through the state, lets you avoid sales charges that come with 529s that are sold through brokers. Plus, residents who contribute to a Georgia 529 plan can deduct up to $2,000 per beneficiary from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.
Go with one of Kiplinger's top five 529 plans.
Why? Hawaii doesn't offer a state income-tax deduction for contributions to an in-state 529 plan, so pick the plan that's best for you.
Idaho College Savings Program
Why? Residents who contribute to the Idaho 529 plan can deduct up to $4,000 per beneficiary each year. The tax break trumps lower fees in an out-of-state 529.
Bright Start College Savings Program (direct-sold version)
Why? This plan, sold directly through the state, lets you avoid sales charges that come with 529s that are sold through brokers. Plus, residents who contribute to an Illinois 529 plan can deduct up to $10,000 per contributor (up to $20,000 for joint filers) from their state income taxes each year. The tax break trumps lower fees in an out-of-state 529.
CollegeChoice 529 Direct Savings Plan (direct-sold version)
Why? This plan, sold directly through the state, lets you avoid sales charges that come with 529s that are sold through brokers. Plus, residents who contribute to an Indiana 529 plan can claim up to $1,000 in state income-tax credits per tax return each year. (A credit is more valuable than a deduction because it reduces your taxes dollar-for-dollar.) The tax break trumps lower fees in an out-of-state 529.
College Savings Iowa
Why? This plan, sold directly through the state, lets you avoid sales charges that come with 529s that are sold through brokers. Plus, residents who contribute to an Iowa 529 plan can deduct up to $2,800 per beneficiary from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.
Go with one of Kiplinger's top five 529 plans.
Why? Residents can invest in any state's 529 plan and still qualify for a state income-tax deduction in Kansas. You can deduct up to $3,000 (up to $6,000 for joint filers) per beneficiary each year.
Go with one of Kiplinger's top five 529 plans.
Why? Kentucky doesn't offer a state income-tax deduction for contributions to its own 529 plan, so pick the plan that's best for you.
START Saving Program
Why? Residents who contribute to the Louisiana 529 plan can deduct up to $2,400 per beneficiary (up to $4,800 for joint filers) from their state income taxes each year. Contribute more than that and deduct the excess in future years. The tax break trumps lower fees in an out-of-state 529.
Go with one of Kiplinger's top five 529 plans.
Why? Residents can contribute to any state's 529 plan and earn a maximum state income-tax deduction of $250 in Maine. To qualify, you must have federal adjusted gross income of $100,000 or less ($200,000 or less for joint filers). So pick the plan that's best for you, regardless of which state sponsors it.
Maryland College Investment Plan
Why? Residents who contribute to the in-state 529 plan can deduct up to $2,500 per beneficiary from their Maryland income taxes each year. Those who contribute more than that can deduct the excess in future years. You can even claim a tax deduction for the amount you transfer from another state's 529 plan to a Maryland plan. The tax break trumps lower fees in an out-of-state 529.
Go with one of Kiplinger's top five 529 plans.
Why? Massachusetts doesn't offer a state income-tax deduction for contributions to an in-state 529 plan, so pick the plan that's best for you.
Michigan Education Savings Program
Why? Residents who contribute to the Michigan 529 plan can deduct up to $5,000 (up to $10,000 for joint filers) from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.
Go with one of Kiplinger's top five 529 plans.
Why? Minnesota doesn't offer a state income-tax deduction for contributions to an in-state 529 plan, so pick the plan that's best for you.
Mississippi Affordable College Savings Program
Why? This plan, sold directly through the state, lets you avoid sales charges that come with 529s that are sold through brokers. Plus, residents who contribute to a Mississippi 529 plan can deduct up to $10,000 (up to $20,000 for joint filers) from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.
Go with one of Kiplinger's top five 529 plans.
Why? Missouri residents can invest in any state's 529 plan and qualify for a state income-tax deduction. You can deduct up to $8,000 per individual taxpayer (up to $16,000 for joint filers) each year.
Pacific Life Funds 529 College Savings Plan (direct-sold version)
Why? This plan, sold directly through the state, lets you avoid sales charges that come with 529s that are sold through brokers. Plus, residents who contribute to a Montana 529 plan can deduct up to $3,000 (up to $6,000 for joint filers) from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.
College Savings Plan of Nebraska (direct-sold version)
Why? This plan, sold directly through the state, lets you avoid sales charges that come with 529s that are sold through brokers. Plus, residents who contribute to a Nebraska 529 plan can deduct up to $2,500 (up to $5,000 for joint filers) from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.
Go with one of Kiplinger's top five 529 plans.
Why? Nevada doesn't have a state personal-income tax. No tax break for contributions to an in-state 529 plan means you can choose any plan you like.
Go with one of Kiplinger's top five 529 plans.
Why? New Hampshire doesn't have a state personal-income tax. No tax break for contributions to an in-state 529 plan means you can choose any plan you like.
Go with one of Kiplinger's top five 529 plans.
Why? New Jersey doesn't offer a state income-tax deduction for 529 plan contributions, so pick the plan that's best for you.
The Education Plan's College Savings Program
Why? This plan, sold directly through the state, lets you avoid sales charges that come with 529s that are sold through brokers. Plus, residents who contribute to a New Mexico 529 plan can fully deduct contributions from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.
New York's 529 College Savings Program (direct-sold version)
Why? This plan, sold directly through the state, lets you avoid sales charges that come with 529s that are sold through brokers. Plus, residents who contribute to a New York 529 plan can deduct up to $5,000 (up to $10,000 for joint filers) from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.
Go with one of Kiplinger's top five 529 plans unless your contributions qualify for the state income-tax deduction. If so, choose the National College Savings Program.
Why? Residents who contribute to a North Carolina 529 plan can deduct up to $2,500 (up to $5,000 for joint filers) from their state income tax each year. But in 2012, income limitations for the deduction are imposed. To qualify, you must have an adjusted gross income less than $60,000 if you're single, less than $100,000 for joint filers, or less than $80,000 if you file as head of household. The tax break trumps lower fees in an out-of-state 529. If you don't qualify for the deduction, pick the plan that's best for you regardless of which state sponsors it.
College SAVE
Why? Residents who contribute to a North Dakota 529 plan can deduct up to $5,000 (up to $10,000 for joint filers) from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.
Ohio CollegeAdvantage 529 Savings Plan
Why? This plan, sold directly through the state, lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to an Ohio 529 plan can deduct up to $2,000 from their state income tax each year. Those who contribute more than that can deduct the excess in future years. The tax break trumps lower fees in an out-of-state 529.
Oklahoma College Savings Plan
Why? Residents who contribute to an Oklahoma 529 plan can deduct up to $10,000 per tax return from their state income tax each year. Those who contribute more than that can deduct the excess in future years. The tax break trumps lower fees in an out-of-state plan.
Oregon College Savings Plan
Why? This plan, sold directly through the state, lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to an Oregon 529 plan can deduct up to $2,000 (up to $4,000 for joint filers) from their state income taxes each year. Those who contribute more than that can deduct the excess in future years. The tax break trumps lower fees in an out-of-state 529.
Go with one of Kiplinger's top five 529 plans.
Why? Pennsylvania taxpayers who contribute to a 529 plan in any state can deduct up to $13,000 per beneficiary (up to $26,000 for joint filers) from their Pennsylvania income tax each year. So pick the plan that's best for you regardless of which state sponsors it.
CollegeBoundfund (direct-sold version)
Why? This plan, sold directly through the state, lets you avoid sales charges that come with 529s that are sold through brokers. Plus, residents who contribute to a Rhode Island 529 plan can deduct up to $500 (up to $1,000 for joint filers) from their state income tax each year. Those who contribute more than that can deduct the excess in future years. The tax break trumps lower fees in an out-of-state 529.
Future Scholar 529 College Savings Plan (direct-sold version)
Why? By picking the direct-sold plan, you avoid paying sales charges that come with 529s that are sold through brokers. Plus, residents who contribute to a South Carolina 529 plan can fully deduct contributions from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.
Go with one of Kiplinger's top five 529 plans.
Why? South Dakota doesn't have a state personal-income tax. No tax break for contributions to an in-state 529 plan means you can choose any plan you like.
Go with one of Kiplinger's top five 529 plans.Why? Tennessee doesn't have a state personal-income tax. No tax break for contributions to an in-state 529 plan means you can choose any plan you like.
Go with one of Kiplinger's top five 529 plans.
Why? Texas doesn't have a state personal-income tax. No tax break for contributions to an in-state 529 plan means you can choose any plan you like.
Utah Educational Savings Plan Trust
Why? Residents who contribute to a Utah 529 plan can claim a maximum state income-tax credit of $87 (or a $174 credit for joint filers) per beneficiary each year. A credit is more valuable than a deduction because it reduces your taxes dollar-for-dollar. The tax break trumps lower fees in an out-of-state 529. Plus, the Utah 529 plan charges very low fees compared with other 529s, and Utah residents don't have to pay the $15 annual maintenance fee levied on out-of-state investors.
Vermont Higher Education Investment Plan
Why? Residents who contribute to the Vermont 529 plan can earn up to $250 in state income-tax credits per beneficiary each year. A credit is more valuable than a deduction because it reduces your taxes dollar-for-dollar. The tax break trumps lower fees in an out-of-state 529.
Virginia Education Savings Trust
Why? This plan, sold directly through the state, lets you avoid sales charges that come with 529s that are sold through brokers. Plus, residents who contribute to a Virginia 529 plan can deduct up to $4,000 per account from their state income tax each year. Those who contribute more than that can deduct the excess in future years. Contributors who are age 70 and older can fully deduct their contributions from their state income tax. The tax break trumps lower fees in an out-of-state 529.
Go with one of Kiplinger's top five 529 plans.
Why? Washington offers only a prepaid-tuition plan and doesn't have a state personal-income tax. No tax break for contributions to an in-state 529 plan means you can choose any plan you like.
SMART529 Select
Why? This plan, sold directly through the state, lets you avoid sales charges that come with 529s that are sold through brokers. And this direct-sold plan allows you to buy portfolios of funds from Dimensional Fund Advisors, a family of first-rate index funds that you would normally have to purchase through a broker or adviser. Plus, residents who contribute to a West Virginia 529 plan can fully deduct contributions from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.
EdVest (direct-sold version)
Why? This plan, sold directly through the state, lets you avoid sales charges that come with 529s that are sold through brokers. That means more of your money will go toward building your college kitty. Plus, residents who contribute to a Wisconsin 529 plan can deduct up to $3,000 per beneficiary from their state income tax each year. The tax break trumps lower fees in an out-of-state 529.
Go with one of Kiplinger's top five 529 plans.
Why? Wyoming doesn't have a state personal-income tax. No tax break for contributions to an in-state 529 plan means you can choose any plan you like.
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