529s are just like other investments; research has shown that low-cost index funds generally end up providing higher returns to investors than funds that spend money on managers who try to pick and choose among stocks.
Opting for passive fund 529s can save as much as 0.85% in expenses, says Savingforcollege.com founder Joe Hurley.
But which of the many low-cost funds should you choose?
It depends on your state. If you live in one of the three states — Indiana, Utah, or Vermont — that offers tax credits, it pays to stay in state. You can get significant rebates on your 529 investments.
For instance, an Indiana couple who earns $100,000 and invests $5,000 in one of their state’s 529 plans, would save $1,040 on their state taxes, according to Morningstar.
Another 27 states allow residents who invest in their home state’s 529 to deduct at least some of their contributions.
Check this Morningstar report to see whether sticking with one of your state’s plans offers significant tax benefits. For instance, an Iowa couple earning $100,000 who contributes $5,000 a year to their state’s 529 would get a reduction in their state tax bill of $449. But South Dakota residents would do well to shop for an out-of-state 529; the same couple would only get $40 back on their taxes.
Also check to see if your state’s plan has gotten poor ratings, like some of South Dakota’s 529 investment options have from Morningstar.
An additional five states — Arizona, Kansas, Maine, Missouri, and Pennsylvania — offer tax parity, which means residents get tax breaks for investing in any college savings plan in the nation.
See what kind of college savings tax breaks your state offers its residents: