Best 529 College Savings Plan - Utah!

(MoneyWatch)  I love 529 College Savings Plans, and every year I look for the best place to put my son's college money. That's because, once a year, we can move our funds to another state sponsored 529 plan. Here's why I love 529 plans and why my son's college money will be staying in Utah's UESP plan.

529 College Savings Plans
Nearly every state has a 529 savings plan. Named for the IRS Code section that enabled these plans, funds placed in a 529 plan can grow tax-free if the funds are used for college tuition and expenses. Most states also allow a tax-deduction or credit when the funds are contributed to the plan in the account owner's home state.

The beneficiary of the plan is the child whose college costs are being funded. The plan's assets can be used to fund the beneficiary's college or post-secondary trade school at thousands of institutions across the globe.

All 529 plans are not created equal. Most states offer at least two different plans - one sold by an advisor, and one that can be purchased directly by the consumer. For the advisor-sold plans, loads are charged on the account to compensate the planner for the sale and for supposedly giving the account owner advice.

Why Utah wins again
In evaluating a 529 plan, I look for three things - expenses, broad choices, and simplicity.

• Expenses - The single most important factor in predicting performance of mutual funds are the expenses. In fact, Morningstar just completed a study that shows expenses were a better predictor of performance than its own star rating. Utah's plan has the lowest overall costs in the nation at 0.18% to 0.35% annually.
• Broad Choices - Emotions have been shown to rob our performance as we move into whatever is hot and out of whatever is not. To be a top 529 plan, I think the plan must offer an entire global equity and domestic bond portfolio rather than the hot flavor of the month fund. Utah is among the states that offer these diversified choices.
• Simplicity - We all have busy lives, and trying to stay on top of things usually leaves us at the mercy of inertia. We neglect to rebalance the portfolio when markets change, or the child gets closer to college-age. Enter the age-based portfolio option, like that offered by Utah, which automatically does all of this for us.

Another thing I love about Utah is that they have resisted the political pressure to add an advisor-sold plan. In spite of turning down this lucrative distribution channel, Utah's 529 plan has grown to over $3 billion in assets. An astounding 92% of those assets are from non-Utah residents. This is yet another sign that investors are wising up to the importance of fees.

Lynne Ward, the executive director of the plan, is also quick to point out that a good part of the growth is coming from recommendations of financial planners. This is one good sign that my industry is doing the right thing, even though Utah doesn't directly compensate those planners. Ward notes that the Utah plan prides itself on transparency and customer service. It's difficult to achieve low costs and high service, but in my experience, Utah delivers.

My advice
In looking for the best 529 plan for you, follow these simple rules:

• Always buy a direct plan - Advisor sold plans create wealth for the advisor at the expense of the beneficiary whose college you are trying to fund.
• Look for a state tax break - If your state gives a tax deduction or credit for contributions, look at home first. If the fees aren't too much higher than Utah's, the value of the tax deduction or credit may outweigh the higher fees.
• Pick an age-based option - The value of the simplicity of building a broad portfolio that both rebalances for market changes, as well as when the child approaches college age, is not to be underestimated.

529 plans are a wonderful tool to achieve tax-advantaged growth to fund college, though you must choose wisely. And remember that expenses and emotions can cut into your returns, just like they can in any investment vehicle.

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