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College is expensive! And it’s only getting worse. What’s your plan? Your answer will depend on your specific situation, but either way, you should get on it while you still have time on your side!

Many people choose to save up for their children’s (or grandchildren’s) college education over time using a vehicle called the 529. This account provides tax efficiency for funds that are intended for qualified educational expenses.

While millions of Americans are using 529’s to build their college savings, many are in the dark when it comes to actually choosing the best 529 plan. Below are several of the most important considerations when establishing or reviewing your 529 plan.

States Are Important

Many states offer tax benefits for utilizing their respective 529 plan. Check out this listing for information on your state (make sure you double check with your accountant and state specific tax laws to confirm!). For example, if you live in Alabama, there is a state income tax deduction for contributions to the Alabama 529 plan. If you live in a state where there are tax benefits, your search should stop here. Use your own state’s 529 plan to take advantage of these tax benefits.

Alternatively, if you are in a state (like my home state – KY) and there are no state tax benefits, you should find the best plan available to you regardless of location. From a state income tax perspective, it will make no difference which state/plan you use.

These are not tips you will generally hear when talking with most 529 salespeople – but the following points may help you pick one plan or fund over the other..

1) Autopilot Funds

Most 529 plans offer an age based automatic investment option to investors. This works much like the target date retirement funds you may have seen in your work retirement plan, except they use the age of the beneficiary to determine the investment selection. In general, these funds become more conservative over time as college grows nearer. Don’t confuse these with the static allocation investment options which automatically invest the money between funds but do NOT change the allocation as the beneficiary gets older.

The age based automatic investment option essentially handles the investment management responsibility automatically. If you are paying an investment advisor on your 529 and you are invested in one of these funds, you should be clear on why.

2) Expense Ratios are Very Important

Against popular belief, past investment performance is NOT a good indicator of future performance (the exception: poor performing funds tend to continue performing poorly). Take a peek at the investment junk you get in the mail… you will see it all over the place – “Past performance may not be indicative of future results.”

What is a GREAT indicator of future performance? Expenses! At least this is what many in the academic circles have been saying for years. Check out Mark Carhart’s “On Persistence in Mutual Fund Performance” if you care to get into the weeds. If I could only suggest one factor to consider when looking at 529 plans, it would be expense ratios. Less is more!

3) Advisors are Expensive

First, I should clarify… Advisors come in many forms. They are bankers, insurance agents, investment brokers, financial advisors, investment advisors, financial reps, wealth managers, etc. If you establish your 529 through a person (they did the paperwork for you) there is a good chance you are paying this person commissions (indirectly) to manage your 529 plan.

Most of the time you pay for what you get, but I consider investments (529’s in particular) an exception to the rule. Most commonly, Advisors sell 529’s and earn lump sum commissions when you add money and ongoing annual commissions on your total account balance. In rare cases, Advisors will charge an ongoing management fee to manage your 529 plan and typically use no commission funds for this setup. Either way, it’s going to cost you (the investor) to have an advisor manage your 529. This all goes on top of the fund’s expense ratio mentioned above.

Here is a breakdown of the most common expense and fee choices you might see associated with using an advisor to help with your 529:

Advisor sold 529 Plans

  • – C Share Funds – The advisor and firm typically receive commissions of 1% of the assets every year (ex. if you have $10K in a 529, they get paid $100/yr in commissions)
  • – A Share Funds – The advisor and firm typically receive commissions of 3-6% of new assets and .25% of ongoing assets every year (ex. you invest $10K and pay $300-$600 in up front commissions and $25/yr ongoing.

Now, there are scenarios where using a commission based advisor to help you with your 529 may make sense. If, for example, you are not financially literate and/or don’t work with a financial planner that will help as part of their planning services, you may be better suited working with an advisor to help you knock this out.

We commonly come across people that are NOT working with an advisor (described above), however, their 529’s are still set up through an advisor sold 529 plan. This is a double whammy! In this case, they are essentially paying for a service they are not using. We call that wasting money in my family. There may be no way around this, but in most cases it’s an easy fix.


  • If your state offers tax benefits, use their plan. If not, find the best plan among all states
  • Autopilot 529 plans can work well – but should you be paying an advisor to manage your autopilot plan?
  • Fund expense ratios are a great indicator of future performance. Lower is better
  • It’s very expensive to use a Financial Advisor setup your 529. In most cases, it’s not worth it
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