I want to start a 529 plan for my grandson, who lives in California. I currently live in Washington but will soon move to Massachusetts. What's my best approach for finding the lowest fees and best tax situation?
-- Bette Baccalaureate
A home-state advantage exists if you can deduct the contributions you make to your state's 529 plan or get a tax credit for those contributions. The taxation of qualified distributions out of the account to your grandson will be free of federal income taxes. Some states, like my home state of Pennsylvania, will let you deduct your contribution regardless of what state plan you choose. Most states aren't that flexible.
You're right to consider fees in choosing a plan. A little comparison-shopping can reduce the drag that annual expenses and fees have on investment returns. States are getting much better in designing plans that manage these costs, but you'll want to compare across state plans. The big three in expenses are annual account fees, plan expense ratios and investment management fees. Consider all three when choosing a state plan.
Keep in mind that it's harder to find a good deal on fees in adviser-sold plans.
You mention fees and taxes but don't mention investment options. The investment choices available, along with the investment manager's annual expense ratios, are important considerations in choosing a plan.
I think the best place to compare
plans is on SavingforCollege.com.
And I'd tell you that even if Joe Hurley, its
founder, weren't Bankrate's College Money Guru.
The Web site also has a special FAQ
page for grandparents. Along with these, Bankrate has a map
that compares 529 plans in each state.