529 savings plans have been rapidly growing in popularity. So, if you're looking to save for your child or grandchild’s future college expenses, you’ve likely considered opening one of these tax-advantaged plans. But how do you choose the right one?
529 plans allow a contributor to prepay a beneficiary's qualified higher education expenses at an eligible educational institution or to contribute to an account for paying those expenses. And while 529 contributions have to be made with after-federal-tax money, the contributions grow free from federal or state tax, making them solid options for education savings.
However, 529 plans can vary. To choose the best one, you’ll need to choose which type of plan makes sense for you and compare tax breaks, benefits for state residents, fees, contribution options, withdrawal restrictions and investment options between plans. Choosing the right plan can take a lot of research, but it’s worth it.
An easy place to start is by checking out the top-ranked 529 plans.
Best direct-sold 529 plans
Direct-sold 529 plans are issued directly from a state financial institution. If you choose one of these plans, you’ll be responsible for managing your own investments within the plan’s online account portal. For this reason, these plans are usually cheaper than investor-sold plans.
Here are the top 10 highest-ranked direct-sold 529 plans, according to Saving for College .
Best advisor-sold 529 plans
Advisor-sold 529 plans are sold through an investment firm. These accounts typically charge a higher fee, but financial advisers manage the plan’s investments for you. Some savers feel these accounts are worth the extra cost because of the access to professional investment advice, actively managed investments and flexible portfolios.
Here are the top 10 highest-ranked advisor-sold 529 plans, according to Saving for College .
529 prepaid tuition plans
Another college savings option worth considering is a 529 prepaid tuition plan. A prepaid tuition plan lets savers prepay tuition at today’s tuition rates at eligible public and private colleges or universities. According to FINRA, "Most states guarantee that the funds you put into a prepaid plan will keep pace with tuition."
Prepaid tuition plans only cover tuition expenses, unlike 529 plans which cover other qualified expenses, like room and board, books and supplies. You can fund these accounts with one lump sum or through installment payments. Often, these plans must be used within 10 years, or the interest on initial contributions could be lost.
According to Affordable Colleges , only nine states offer prepaid tuition plans.
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