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American families are missing an estimated benefit of $237 billion for future educational savings because they’re not using 529 college savings plans effectively, according to an October 2018 report from Morningstar. That figure breaks down into $76 billion in lost tax benefits and $161 billion from unrealized investing gains. That amounts to about $4,000 per student for the average family – no small amount of money.

One of the biggest problems – many families aren’t even aware of the program!

“Seventy percent of people are unaware that 529 college savings plans exist. Only 14 percent of families are actually using one,” says Peter Mansfield, chief marketing officer of U-Nest, a mobile app that allows savers to set up 529 accounts.

Those figures are all the more reason why families need to take full advantage of 529 college savings plans – and it’s not just parents who can enjoy the tax benefits either.

Best 529 plans

The best 529 plans have similar things in common: low costs, good benefits and a solid track record of investment performance. Here are five of the top 529 plans:

529 FAQS

What is a 529 plan?

A 529 plan is an education savings plan that allows you to save for qualified education expenses. While the 529 plan was developed to allow families to save for college, its mandate has since been expanded to include K-12 tuition at private schools, as part of the changes from the 2017 Tax Cuts and Jobs Act.

A 529 plan allows contributions to grow tax-deferred, and any money may be withdrawn tax-free if used for qualified education expenses at eligible institutions. Plus, many states allow contributions to be deducted from your state’s taxable income, offering another incentive to contribute.

A 529 plan also allows you to invest in potentially high-return investments such as stocks, allowing you to amass more savings. Plus, anyone can establish and contribute to a plan, meaning relatives and even friends can add to the pot and help your child’s education.

All these features make the 529 plan one of the best college savings plans.

What are the different types of 529 plans?

A 529 plan comes in two broad varieties – a prepaid tuition plan and an education savings plan.

A prepaid tuition program allows you to purchase college credits at today’s prices for future use. You can purchase credits only at participating colleges and universities for the plan’s beneficiary. These plans usually can’t be used to pay for future room and board costs, and will not allow you to pay for primary and secondary school education.

An education savings plan allows a saver to open an investment account for the benefit of a future student. These plans can pay for tuition, as well as room and board, and some other qualified expenses too. Withdrawals may generally be used at any U.S. college or university as well some non-U.S. institutions. This plan can also be used to pay for K-12 educational tuition costs at private schools.

How to open a 529 plan

You can open a 529 plan directly through a specific state’s plan or through a broker.

If you invest directly with the state plan, you’ll have to register, research the available investments and generally track the 529 plan over its lifetime — typically all online. In short, you’re responsible for managing and overseeing basically all facets of the plan.

If you open an account through a broker, you may be able to benefit in a couple ways. First, you can often choose from multiple 529 plans, though you may lose some state tax deductions if you opt for an out-of-state plan. Second, you may be able to take advantage of the advice of an investment professional, who can help you set up how to invest in the plan and review it over time.

Either way, it’s better to start earlier than later, since it will allow your money more time to grow and compound.

[READ: 7 simple ways to maximize your 529 plan]

What happens to a 529 plan if not used?

The short answer is that you’ll have to withdraw the money and pay taxes on the earnings, as well as an additional 10 percent penalty. While that sounds unattractive, the plan is actually surprisingly flexible and gives you many ways to avoid this outcome.

“In general, you can continue holding the assets in a 529 plan indefinitely as long as there is a living beneficiary listed,” says Jordan Sowhangar, CFP and wealth adviser at Girard.

And that means account owners have a long time and many options on how to act.

“The original beneficiary could change their mind and go back to school, or could have children of their own that could then be named as the beneficiary,” says Sowhangar. “The account owner is usually able to change the beneficiary of the 529 plan without penalty or tax as long as they are a qualified family member.”

The IRS provides rules for who is considered a qualified family member, and each state’s plan will explain how frequently you can change the plan’s beneficiary. So you’ll need to check carefully so that you stay within the plan’s rules.

So at a minimum you can defer the penalty and taxes for a long time, if the original beneficiary has no qualified expenses. And that provides more time to find a potential new beneficiary who can take advantage of the account.

How do 529 plans work with multiple kids?

A 529 plan can have only one beneficiary at a time, but this beneficiary can change over time. So you can use the same plan for different children, but it will require planning ahead to avoid running afoul of the plan’s rules and restrictions.

“If your children are more than four years apart, you may be able to utilize one 529 plan for both by changing the beneficiary on the plan once the first child graduates or has no further qualified education expenses,” says Sowhangar.

But if you go this route, you’ll need to structure your investments carefully so that each child obtains the maximum benefit from the plan. For example, an older child will have less time than a younger child to enjoy the benefits of compound growth. It may make more sense to invest in something more conservative as the older child needs the funds, while the assets for the younger child can remain in more aggressive, growth-oriented investments.

The increased complexity of this approach means that it may be better to open a 529 plan for each child and then tailor the investments to the needs of each.

“In addition to being able to better control investment suitability, it also allows for better record keeping for each beneficiary, as well as potential state-tax deduction benefits for more than one plan, depending on the state you live in,” says Sowhangar.

Sowhangar also notes that separate plans could make it easier to track contributions and stay compliant with tax regulations on gift tax exclusions.

Can you lose money in a 529 plan?

That depends on the type of plan and how the money is invested.

In a prepaid tuition plan, you’re buying college credits for future use. But these plans are not guaranteed by the federal government, and only some state governments guarantee them. So if the plan’s sponsor has a financial shortfall and it’s not backed by a government sponsor, you may lose some or all of your money. While this scenario is not likely, it is possible.

In an education savings plan, you’re exposed to potential loss if your account is invested in certain types of assets such as stocks and bonds or funds based on these assets. These investments are not protected by federal or state governments. However, certain types of investments in bank products may be guaranteed by the Federal Deposit Insurance Corp. (FDIC), meaning no risk of principal.

But it can be prudent to take some risk if you have a long time until the money is needed.

“For instance, if the beneficiary has 10+ years until they need to use the funds, you can generally afford to take on more risk in the portfolio as it will have more time to recoup any potential losses incurred during a down market,” says Sowhangar.

“Once the beneficiary is closer to needing those funds however, it is wise to move the investments to something more conservative. Depending on the plan, there may be low-risk options like a money market mutual fund that is designed to preserve your money,” she says.

If you have money remaining in a 529 account after it’s been used, the account owner won’t have to forfeit that money. Any remaining funds can be withdrawn, though you will owe taxes and penalties on any earnings from the contributions in the account.

How do taxes work with a 529 plan?

Tax advantages are one of the biggest benefits of 529 plans, and savers can benefit in several ways.

“In the last several years, a 529 plan has become an attractive vehicle due to its tax advantages,” says Adam Holt, CFP and CEO of Asset-Map, a company that helps savers track their financial plan. “529 plans are inspiring people to actually save, especially for education/college expenses. The 529 plan tax advantages are a good incentive.”

First, a 529 plan allows you to grow your contributions on a tax-deferred basis, so you won’t pay any taxes on your earnings each year, as long as you hold the money in the account.

Second, when you take out money for qualified educational expenses, you won’t have to pay any taxes on the money you withdraw. So you save taxes on your capital gains.

Next, some states offer you a tax deduction for contributions that you make to a 529 plan. So you’ll be able to write off a portion of your taxes for doing something smart anyway.

“Utilizing a program that gives you a tax incentive is probably the single most appealing aspect of a 529 plan,” says Holt.

[READ: What you need to know about 529 college savings plans]

Can 529 plans be used for things other than college?

While 529 plans were originally created to help pay for college expenses, the plans can now be used for tuition expenses at private schools for grades K-12. Recent tax changes permitted 529 plans to be used for these primary and secondary schools.

However, there’s a key difference between how the money can be used at these institutions.

For college, qualified expenses include tuition, fees and textbooks at an eligible institution. In addition, these expenses may also include room and board costs, as well as other expenses such as computers used primarily for educational purposes.

In contrast, for K-12 private school education expenses, only the cost of tuition can be paid from a 529 plan without penalty. Up to $10,000 a year can be used here.

[READ: How to tap your 529 plan to pay for college tuition]

Advantages vs. disadvantages of 529 plans

While 529 plans do offer many advantages, they still require a trade-off from savers.

A 529 plan can offer tax-deferred growth on your contributions, a tax-free withdrawal of money, and even tax deductions on your state taxes. And these funds can be used to pay for other closely related educational expenses such as room and board, software and computers.

“529s can also be used in estate planning for grandparents that want to fund their grandchildren’s education, as well as by those looking to create a long-term education family fund,” says Holt.

So a 529 plan offers a lot of flexibility to savers, especially those who can take full advantage. But in exchange for these benefits, you have to endure some drawbacks.

Because the plans are standardized and administered by the state, you may not be able to invest in exactly what you want. So if you have investing expertise, you may find the investment options less than optimal.

In addition, not all states offer a tax deduction for contributions, and so you may simply not receive that benefit. In addition, you won’t receive a state tax deduction for a state where you don’t pay taxes, so you’ll need to factor that into your decision-making.

And of course, one of the biggest downsides is the taxes and penalties that accrue if you withdraw the money for non-qualified expenses, even accidentally.

“Individuals saving for college have many ways to save for their planned education expenses, but 529 plans are definitely the biggest component for education funding right now,” says Holt.

And combing through the wealth of options before applying can be daunting.

“The process of finding and then applying for a 529 plan can take many hours,” says Mansfield. “It can be intimidating and confusing. Each state’s plan has its differences, and many parents are unaware that they can select almost any state’s plan, not just the one in their own state.”

“Assuming that a parent can navigate through the options and make a sound choice, they are then confronted with up to 20 pages of forms to complete,” says Mansfield. “The net result is that the majority of parents give up and pick a less-advantageous savings approach.”

Best 529 plans

These states offer college savers a solid combination of low costs, good benefits and a proven track record of investment performance. After all, these are three big things you should be looking for in any 529 plan.

Ohio’s 529 plan, CollegeAdvantage

Ohio’s plan offers savers a diversity of investment plans – three based on age and five based on your risk tolerance, as well as other investment options, including FDIC-backed accounts. The plan uses Vanguard funds, a leader in low-cost funds, and DFA funds. The plan is available for both in-state and out-of-state savers, and it offers up $4,000 in state tax deductions per beneficiary for Ohio residents.

New York’s 529 plan, Direct Plan

New York’s plan is available to residents of any state, and it offers low-cost investment options using Vanguard funds, a recognized leader in keeping investment costs low. Residents of New York State can receive some hefty state tax deductions, up to $5,000 for single filers and $10,000 for joint filers, making the program an attractive offset for the state’s high taxes.

Wisconsin’s 529 plan, Edvest

Wisconsin’s Edvest program is available to residents of any state, and the 529 plan is another highly regarded investment option. The plan offers 18 age-based options and allows you to take on a more aggressive portfolio where you could earn a higher return. Edvest also offers FDIC-backed products, so you have the option of a guaranteed, risk-free return. Edvest uses funds from well-known asset managers TIAA-CREF and T. Rowe Price, among others. Wisconsin residents can receive up to $3,200 in state tax deductions per beneficiary.

West Virginia’s plan, Smart 529 WV Direct College Savings Plan

West Virginia’s plan is currently limited to residents of the state, although its funds offer some of the lowest annual fees among 529 plans. The plan uses funds from Vanguard, a highly regarded low-cost leader, and Invesco, another well-known manager. West Virginia does not cap the tax deduction on filers, giving savers extra incentive to save as much as possible.

California’s plan, ScholarShare 529

California’s ScholarShare 529 is available to residents of any state, and it includes funds from TIAA-CREF, T. Rowe Price, and others. The plan offers a wide variety of age-based funds and other portfolios, and provides many passive funds at low costs.

Bottom line

A 529 college savings plan offers one of the best vehicles to save for a child’s educational costs, both for primary school and college. While many families are still leaving billions on the table, it’s easy to set up a 529 plan and take maximum advantage of all it offers.

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