529 plans indexed options

The investment of college savings in a 529 Savings Plan should follow the fundamental principles embedded in the Bogleheads investment philosophy: emphasis on low investment costs; broad diversification both within and among asset classes; the use of low cost index funds when available; and careful consideration of risk. Emphasizing low costs suggests that 529 savings plan investors should eschew the advisor sold 529 plans and select among plans that are directly sold. This page provides information on 529 plans utilizing index funds. For an examination of 529 plan essential features, please refer to 529 plans.

Index options in 529 plans
Many states now offer indexed portfolios in 529 savings plans. States have the option of offering indexed portfolios in the three basic 529 saving plan strategies:


 * Age-based funds that provide balanced fund of fund portfolios with allocations that change over time, lowering stock market allocations as the time to college matriculation shortens. Many plans offer age-based plans labelled Aggressive, Moderate, and Conservative, each with different stock/bond allocations.


 * Static allocation funds provide balanced, usually fund of fund, portfolios that maintain a fixed asset allocation policy. These portfolios can hold a bond/stock mixture or can be exclusively devoted to stocks (as an example, a stock portfolio consisting of a Total stock market index fund and a Total international stock market index fund) or bonds (as an example, a bond portfolio consisting of a Total bond market index fund and an inflation-indexed bond fund).


 * Individual funds provide single index fund portfolios (examples include an S&P 500 index fund, an International index fund, a REIT index fund, or a bond index fund).



Since most states offer tax benefits for 529 plan contributions, an investor should first examine the home state plan and consider the plan options, expenses, and tax savings before considering out-of state plans.:

One can determine the breakeven point where using a lower cost plan option becomes cheaper than a state plan providing tax deductible and/or matched 529 contributions by using the following factors.


 * The tax savings amount (Deductible contribution x marginal state tax rate) + match.
 * The cost differential between the plan and the lower cost plan.
 * Dividing (1) by (2) provides the capital accumulation point where the lower cost plan subsequently overtakes the tax benefit.

A number of states now recapture deducted 529 contribution taxes if a plan is transferred to an out of state plan.

States with no tax deductions or matching contributions
The following states have 529 plans but do not offer any tax deductions or matching contributions for donor contributions to a 529 savings plan. Therefore, residents in these states should select from among the lowest cost plan providers.

States offering deductible contributions for both in-state and out-of-state plans
These states offer the same deduction in and out of state, so investors should choose from among the lowest cost plans, but remember to claim their deduction.


 * Arizona provides a deduction for both in-state and out-of-state 529's.
 * Kansas provides a deduction for both in-state and out-of-state 529's.
 * Maine provides a deduction for both in-state and out-of-state 529's.
 * Missouri provides a deduction for both in-state and out-of-state 529's.
 * Pennsylvania provides a deduction for both in-state and out-of-state 529's.