Saving for college can be a complicated endeavor. If you’re trying to decide where you should be saving for your kids’ future education, take a look at this article.

And if you’ve done some research and decided to open a 529 college savings plan, you probably know that the number of options available is overwhelming.

Most 529 plans are sponsored by states, but you don’t have to go with the plan that is sponsored by your home state.

Here’s how to consider the options available and choose the best savings plan for your family.

Direct-Sold vs. Advisor-Sold

There are two types of 529 plans, and some states offer one or the other, while some offer both.

Direct-sold plans can be opened by anyone, regardless of whether you work with a financial advisor.

Advisor-sold plans must be opened through a financial advisor. These plans are typically higher cost, and there may be sales commissions when you purchase investments within the plan.

Don’t let the names fool you, though – most advisors will still give you advice on your direct-sold 529 plan. For most families, this is the way to go.

Look for Tax Breaks

You probably know that money saved in a 529 plan grows tax-free if you use it for qualified education expenses.

But there are potentially more tax breaks depending on where you live.

Some states offer state tax deductions for contributions made to a 529 plan. So when deciding which plan to use, first take a look at your own state’s plan and see if there are tax benefits available.

This article is a great summary of state tax benefits.

Review Investment Options and Fees

Investment options and fees are two additional factors to consider when choosing a plan.

Look for plans that offer broadly diversified investment options. And do some research to find out how much you can expect to pay in fees on each of those investment options.

Savingforcollege.com provides a good quick reference which gives you a general idea of the fees charged by each state’s plan.

Many plans offer age-based portfolios, which can be a convenient way to save. These investment options become more conservative as your child becomes closer to college age. This means you don’t have to worry about adjusting your asset allocation manually over time.

Other Considerations

Custodial vs. Individual

If you are moving funds from a custodial bank or brokerage account (UTMA accounts fit into this category), you most likely need to open a custodial 529 plan.

This means that the child is the owner of the plan instead of the parent. The beneficiary cannot be changed, unlike in an individual plan, and the child gains full access to the money once they reach the age of majority in your state.

These limitations mean it usually makes the most sense to open an individual account if you are starting from scratch.

Flexibility

As with any savings goal, it’s important to balance tax savings and flexibility.

529 plans can be a fairly flexible option – the definition of qualified education expenses is pretty broad. And if your child receives a scholarship, you can withdraw funds up to the scholarship amount without penalties, although you will still pay income taxes on the gains.

If your child decides not to go to college, you can change the beneficiary, but if you decide to take the funds out for non-education related expenses, you’ll owe penalties and taxes.

So take some time to think about how much of the expected cost of college you want to save in a 529 plan vs. another more flexible savings vehicle like a brokerage account. As with most personal finance decisions, there is no perfect answer.

Joe Calvetti is a CPA and the founder of Still River Financial Planning, a comprehensive, fee-only financial planning firm that specializes in working with young families and professionals. Click here to learn more about how we work with clients.

Are you interested in staying up to date on new articles and other news from us? Sign up for our newsletter or follow us on Facebook and Instagram.

Ready to learn more about how we can work together? Schedule an introductory meeting.

Disclaimer: The information provided above is for educational purposes only and should not be considered financial, legal, or tax advice. You should consult with a professional for advice specific to your situation.