Over the years, my clients and I have developed strategies to use 529 plans effectively when building a college fund. Here are three to get you started.
Vanguard’s 529 plan is a good default choice if your state does not offer tax benefits for using an in-state plan. Most states (including CA, WA, HI, TX, and NJ) do not offer a tax benefit for in-state plans, so there is no opportunity cost with using an out-of-state plan like Vanguard’s. Of the many plans across the country, Vanguard’s plan is well-regarded for its low cost and variety of funds.
For New York residents, NY’s 529 plan is a great choice since it offers low-cost Vanguard funds while maintaining NY state tax benefits.
Open a separate account for each parent. Both plans mentioned above (Vanguard’s and NY’s) limit the number of investments at 5 and require at least a 5% investment in each option. By opening 2 accounts for one child, you essentially get to hold 10 investments and can allocate as little as 2.5%.
Also, 529 plans limit you to one trade per calendar year. With separate accounts, you can use this annual trade at different points in the year, giving you more flexibility.
Invest on a regular basis. Not just because this makes saving for college more manageable, but because both recommended plans let you make an investment selection for each deposit. Changing this selection with every deposit does not count as your annual trade. So if you make a monthly deposit, you have a chance every month to rebalance.