You’ve decided that you want to save for your children’s college education! That’s a great first step to take in preparing financially for the future. However, you encounter a challenge: with numerous 529 college savings plan options available, where should you choose to open one?? The Best Brokers To Open A 529 Plan
That’s a reasonable question – there are many options to open a 529 plan. There are options available directly to consumers, there are options available at brokers, and there are prepaid tuition programmes available in certain states. Then, there are the rules for 529 plans.
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What most people don’t realize is that the 529 plans offered by the major investment brokers (Fidelity, Schwab, and Vanguard) are all actually state plans. And your state also probably has a state plan. The Best Brokers To Open A 529 Plan
Thankfully, there aren’t really any bad options when it comes to 529 plans. Yes, there are some that are better than others, but in general, you can’t mess this up too badly. For most people, the 529 plan offered by your state is the best 529 plan to open. After that, you can either look at the nationwide plans or pick a top plan like California’s ScholarShare. The Best Brokers To Open A 529 Plan
Investment Broker 529 Plan Offerings
As we mentioned, the main investment brokers are all actually working with state plans. This can be a good thing or an annoying thing, based on your state. The Best Brokers To Open A 529 Plan
Remember, one of the biggest benefits of 529 plans is the tax deduction you may get for contributions. And most states only allow you to claim the 529 plan tax deduction if you use their state’s plan (there are seven states that let you get a tax deduction for using any plan).
For example, I’m in California and choose to use the ScholarShare plan. However, I still have my investments elsewhere. This might be the same for you as well.
Here’s what states correlate to which broker:
- Fidelity: Arizona, Connecticut, Delaware, Massachusetts, and New Hampshire – The Best Brokers To Open A 529 Plan
- Schwab: Kansas
- Vanguard: Nevada
- T. Rowe Price: Alaska
- Wealthfront: Nevada
So, if you open Schwab’s plan, but you live in Illinois, you won’t get the Illinois tax deduction. You can still use the plan; it just won’t be as beneficial.
Find Your State’s 529 Plan
Find your state in the list below and get the best plan in your state:
Does Opening A 529 Plan Make Sense?
The first thing you need to ask yourself is whether opening a 529 plan even makes sense financially. It makes the most sense financially when you’re saving for college and it’s a long way away – 10+ years. We’re fans of a 529 plan for saving for college, but it has to be done right. The Best Brokers To Open A 529 Plan
You see, the big benefit of saving in a 529 plan is that your earnings in the plan can be withdrawn tax-free when used to pay for qualified higher education expenses. At the same time, a big drawback of using 529 plan money to pay for college is that money from these accounts doesn’t allow you to use tax credits and tax deductions for your higher education expenses. Basically, you can’t double-dip with both 529 tax-free money and higher education tax credits. The Best Brokers To Open A 529 Plan
So, if you don’t think you’ll get enough growth in your 529 plan to offset the potential for tax credits and tax deductions, it might not make sense to use a 529 plan. This mainly applies to late savers.
If saving in a 529 plan does make sense for your situation, you need to think about where it makes sense to open one.
What To Consider When Opening An Account
There are several factors to consider when opening a 529 college savings plan. The Best Brokers To Open A 529 Plan
The first factor to consider is whether you get any state benefits for your contribution to a 529 plan. Right now, 30 states offer tax deductions for contributions to a 529 plan. However, of those 30 states, only 7 offer tax deductions to use ANY’s plan: Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana, and Pennsylvania.
The other remaining 24 states require you to use their state’s 529 plan if you want to get a tax deduction on your state income tax (there currently is no Federal tax deduction for contributing to a 529 plan).
For the other 20 states that get no tax benefits for contributions and the 7 states where you can contribute anywhere, you should consider the following:
We track the best 529 plans by performance. California’s ScholarShare plan has the lowest fees nationally and great performance. It doesn’t rank as well because California doesn’t offer any tax deductions. However, if you’re in Texas or Florida, it can be a compelling option. The Best Brokers To Open A 529 Plan
Where To Open A 529 Plan
We have our full guide of 529 Plans by State that breaks down what your plan allows, what deductions are available, and more. Check it out here: 529 Plan Guide by State.
An easy solution is to use a service like Backer, which takes care of everything for you without thinking too much about it.
A few plans have continued to rank highly over time, and we wanted to share those with you below. If you’re considering opening a 529 plan, here are some of the best places to do so: The Best Brokers To Open A 529 Plan
FAQs
What are the tax benefits of a 529 college savings plan?
529 plans offer tax-deferred investment growth, and qualified withdrawals for education expenses are typically tax-free at the federal level. The Best Brokers To Open A 529 Plan
Should I open my state’s 529 plan or a plan offered by a major investment broker?
Choosing depends on state tax benefits and investment options. Some states offer deductions or credits, while broker plans may provide broader investment choices.
When does a 529 plan make the most financial sense for saving for college?
529 plans are most effective when started early, allowing investments time to grow tax-free before education expenses occur.
What are the most important factors to consider when choosing a 529 plan?
Key factors include fees, investment options, state tax benefits, and overall plan flexibility. The Best Brokers To Open A 529 Plan