Q. Is the Alaska 529 plan a better option than the New Jersey plan? I have two kids, 8 and 2, and we would like to start college savings plans for them.
A. Is one 529 plan better than another?
Virtually every state offers a 529 plan, said Betty Thomas, a chartered financial consultant and certified financial planner with Lassus Wherley, a subsidiary of Peapack-Gladstone Bank, in New Providence.
She said each plan may be unique to each state, with some offering incentives if students are residents and attend college in the state.
Thomas said the NJBEST 529 plan offers a tax-free scholarship up to $1,500 if students attend a college or university in New Jersey.
Some state plans offer tax deductions for residents who contribute to their state’s plan, but neither New Jersey nor Alaska do.
So how can you decide which plan is best for you?
Thomas said a good starting point would be to review the investment options for the 529 plan to make sure they align with your risk tolerance.
“Generally, 529 plans offer age-based portfolios, meaning the allocation will adjust based on the age of the child over time,” she said.
For example, she said, an age-based plan for your youngest could have a higher exposure to equities, then it would become more bond-based and conservative as the child approaches college.
Your oldest would also have equity exposure, but it might not be as much as your youngest child.
“Age-based portfolios are more common because the account portfolio adjusts over time automatically, providing a bit of relief for those more sensitive to market fluctuations because the 529 plan investment options are basically on auto-pilot,” she said.
Next, you’ll want to look at fees.
These can be complicated to sort through, but essentially, they break down to an advisor-sold plan or a direct-sold plan.
For example, she said, the Alaska 529 plan can be purchased through T. Rowe Price College Savings Plan (Direct) or through John Hancock Freedom 529 (Advisor).
“Advisor plans may cost more because of expenses not typically incurred if the plan was a direct purchase; such as sales charges, program management fees, and account maintenance fees to name a few,” Thomas said. “These additional fees may reduce the plan performance over time.”
That’s why comparison shopping is an important part of the process when deciding on a 529 plan.
Thomas said you should also consider plans with an experienced and reputable investment manager and plans that have historically had a strong performance.
We recommend you dissect 529 plans with SavingForCollege.com, a site that makes it easy to compare costs, rankings and other concerns.
Email your questions to Ask@NJMoneyHelp.com.
Karin Price Mueller writes the Bamboozled column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com’s weekly e-newsletter.