Section 529 Plans Get Top Marks for College Savings
The study, “Miracle Growth” compares the potential after-tax accumulations for 529 plans, mutual funds, Education IRAs, and Series I savings bonds.
Assuming that the same annual contributions are deposited at the start of each year, the advantage of saving with a 529 plan instead of a similar mutual fund, depending on the family’s tax bracket:
- varies between 4.9% and 10.2%, during a six year time horizon,
- ranges from 9.5% to 20.9% over a 12 year period, and
- with a full 18 years to save for college, the advantage varies between 14.7% and 34.2%
Tax Value
When examining the value of state tax deductions, the study found that 529 plans have a significant relative advantage over comparable mutual funds, if fact:
- for those with 18 years to save for college, the advantage of the 529 plan with a $5,000 state tax deduction can be as much as 43%, and
- even at the six-year time horizon, the advantage ranges from 13.5% to 17.8%
Compared to IRAs
While 529 plans do not necessarily outperform Education IRAs in all cases, their advantages are evident if there is a state tax deduction, or if expenses for the Education IRA are higher than the 529 plan.
Depending on the value of the state tax deduction, in 529 plans families with 18 years until college saw an advantage as high as 13.6%, while those with a six-year time horizon saw advantage as high as 8.9%
Versus Series I Savings Bonds
The study shows that Series I savings bonds significantly underperform 529 plans when households are not able to receive the tax exclusion on interest from the bonds, from 6.8% to 26.7%.
And the relative advantage of the 529 plan ranges from 14% to 35% when the value of a state income tax deduction is taken into account. Only when the time horizon is short, and when households are able to take advantage of the tax exclusion on interest, do Series I savings bonds modestly outperform the Section 529 plan, by an average of less than 1%.
Assumptions
Assumptions used in the analysis compare the managed allocation investment option common to most 529 plans against similar asset allocation strategies used in mutual funds and education IRAs over a six, 12, and 18-year time horizon.
Other assumptions include the effects of individual tax brackets, state tax deductions, and investment fees.
A copy of the “Miracle Growth” study can be viewed at