Grade Your 529 Plan

Click here to see the worksheet below

THESE DAYS, the question isn't should you invest in a 529 College Savings Plan, but rather, which one? With more than 80 plans out there, choosing isn't easy.

If you're a parent who isn't already familiar with 529 plans, then it's time for a crash course. The beauty of these plans is that they offer tax-free withdrawals for college expenses and anyone is eligible. Contribution limits vary by state and can be as generous as $315,000, though some states have limits of $230,000 or less. The plans are operated at the state level, but handled by an investment management firm. (Pretty much all the big mutual-fund players, including Fidelity, Vanguard, T. Rowe Price and TIAA-CREF, are now in on the action.) The good news is, the vast majority of these plans are open to anyone — regardless of which state you call home. The bad news is, that means you've got to figure out which one is best.

One of the first decisions you need to make is which type of plan you'd like to invest in — the prepaid college tuition plan or a college savings plan. In our opinion, this is a no-brainer: Go with the college savings plan. A prepaid tuition plan allows you to pay today for tuition further down the line. Sounds great, but most of these plans only guarantee that you'll be covered if your child goes to an in-state public school. (In other words, if Junior gets into Princeton instead of State U, you could be woefully underfunded.) A college savings plan works more like a 401(k). You're given a handful of investment options to choose from, and you can invest aggressively or conservatively.

But even within the realm of college savings plans, your options can vary significantly from plan to plan. Here are some tips on finding the best one:

Always Start With Your State's Plan
Many states offer tax deductions on contributions as well as state-tax-free withdrawals. In some cases, these benefits may be compelling enough to go with your state plan, even if it's not perfect in other respects. On the other hand, some states still don't offer college savings plans, while others don't offer much in the way of incentives. If that's the case, look farther afield.

Seek Maximum Flexibility
What separates the good from the bad is the flexibility of the plan. The best plans offer several investment options (both age based and static) as well as large contribution amounts.

Keep an Eye on Fees
Obviously, the fewer fees you pay, the better. If a broker or financial adviser is selling you the plan, be sure to ask how he or she is paid. Most states offer two versions of their plans — one for investment advisers and one for direct sales. Cleary, you don't want to pay a commission unless you have to.

With these tips in mind, you're ready to use our Grade Your 529 College Savings Plan calculator. Enter in the variables of the plans that you're considering to see which one is the best.

Next: The College-Savings Superpage