Things to Think About When Contemplating a 529 Plan

Things to Think About When Contemplating a 529 Plan

A little while back, we here at MomVesting took a basic overview look at college savings plans. Now we're revisiting the subject and delving a bit deeper into the vast array of 529 plans out there in an effort to help readers be informed and make informed choices.

What you should know (and maybe already do) is that each state and the District of Columbia offer up at least one version of a 529 plan. Trying to find the best plan for you among those fifty-plus plans in existence might seem more time-consuming than teaching Junior the ins and outs of potty training.

In fact, even finding a 529 starting point can seem daunting. So, before we plunge into the specifics of each state's plan(s)--which we plan to do in our future posts--we're taking a minute to focus a bit more on the criteria for choosing a 529 plan.

Savings Vs. Prepaid

As was mentioned in our earlier post, there are two basic types of college plans: savings plans and prepaid plans. Savings plans function just like the name suggests: you put your money in, watch it grow, and use it to help pay for college and related expenses after Sally graduates .

Prepaid plans work a little differently. You are able to "lock in" today's college rates by essentially purchasing tuition now. Whereas savings plans can be used at virtually any college nationwide, prepaid plans don't generally give you that kind of flexibility when it comes time to send Sally off to college.

Direct-Sold Vs. Adviser-Sold

Once you've decided which plan is the one for your family, another thing to consider is whether you're going to do the investing into the plan yourself (direct-sold plans) or if you'll want/need a financial adviser to help with the investing (adviser-sold plans).

Direct-sold plans do offer some advantages in that expenses are usually lower overall than adviser-sold plans. The DIY direct-sold option also can translate into a lot of research and homework on your part, whereas an adviser-sold plan can help cut out some confusion or mystique surrounding investing. Knowing which route you want to take can help narrow down your choices. This is important because the plans available are about half direct-sold and half adviser-sold, making your options seem endless unless you have a preferred direction.

Other Factors

There are a number of other factors you might want to keep in mind when comparing 529 plans:

  • Are there any minimum and maximum contribution amounts?
  • If you participate in the plan, are you eligible to receive any kind of state tax break?
  • Is the overall performance of the plan shaky or solid?
  • Does the plan come with any kind of added perk or bonus, like a rewards program or state matching grants?

It does sound like a lot to take in, but it needn't be an overwhelming or daunting task. We're here to help. Keep watching in the upcoming weeks for highlights on each state's 529 plan(s).

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Ravi Gupta's picture

Ravi Gupta wrote:

Thu, 04/14/2011 - 12:29 Comment #: 1

My parents never had 529 plan for brother or myself. Instead they decided to go with pre-paid and in the end paid around $8k for each of us. Personally I think the prepaid plan is better considering how fast the cost of college is rising.

-Ravi Gupta

Suzanne@GrowingRichKids's picture

[email protected] wrote:

Fri, 04/15/2011 - 13:02 Comment #: 2

Be careful with the pre-paid plans and make sure you read the fine print. People in Illinois are just finding out that their ability to lock in prices are not 100% guaranteed. From an article on Yahoo! Finance on April 1 2011 "College Plans You Thought Were Safe":

Florida, Massachusetts, Mississippi and Washington do guarantee that the state will step in to make good on the promises to keep up with tuition inflation if the fund can no longer meet its obligations because its own investments have underperformed, according to, a Web site about 529 plans. Illinois, Kentucky, Maryland, Michigan, Nevada, Pennsylvania, South Carolina, Virginia and West Virginia do not offer an overarching guarantee.

Melinda Gregory's picture

Melinda Gregory wrote:

Fri, 04/15/2011 - 18:52 Comment #: 3

Suzanne- thanks for the info! Homework, homework & more homework seems to be the key when deciding which route to go to help fund future college endeavors.

Ravi G.- sounds like the prepaid worked out really well for you. Thanks for your insight!