Saving for school is a no-brainer, but choosing which 529 college savings plan is best puts parents to the test, according to The Wall Street Journal.
With 85 different federally tax-exempt plans available, investors should scale back the menu of mutual funds, starting with looking locally.
Twenty-seven states and the District of Columbia offer state tax credits or deductions to residents who choose in-state 529 plans. Some states make investing at home even more attractive by matching funds for qualifying low-income participants, or special protections against creditors. Advisers agree that this is the strategy parents of children within eight years of college should consider.
Investors should be alert, however, because sometimes states limit the amount 529 participants can deduct, and sometimes, state plan expense ratios offset the benefits of tax savings.
West Virginia, for example, offer state tax breaks as high as 6.5%, but an expense ratio of between 0.75% and 1.05%.
"And then, overlaid on all this is the quality of the investment options," said Mark Balasa, a financial planner who works in Itasca, Ill. "It's just so complicated," he told the Journal.
"If you've got a real long time horizon, and depending on the timing of your contributions, it may be worth going out of state," said Jim Winter, a planner in St. Albans, W.Va.
New York's Vanguard-managed 529 College Savings Direct Plan costs 0.56%, and offers three portfolios based on the age of the child, along with 12 others. Nevada, which has expenses between 0.6% and 0.79%, offers 17 individual investment options and three age-appropriate portfolios.
Honorable mention also goes to TIAA-CREF plans in New York and Michigan, where fees are low.
Rich Chambers, a financial planner in Melo Park, Calif., recommends Virginia's CollegeAmerica Plan, which offers investors more latitude and uses various share classes of American Funds, including those that allow no-load sales.
Chambers favors Virginia because it allows more options, greater control and a load waiver. "Most of these plans have these brainless age-based allocations," Chambers said. "But we feel it gets way too conservative."