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Financial planners agree that a 529 plan is usually the most advantageous way to save for a college education.
Funds in the account grow tax-free — just like an IRA — and they stay free of tax as long as you use the money for qualified education expenses, such as tuition, room and board and supplies.
In 2022, New Jersey’s plan, NJBEST, joins the majority of states that offer residents an income tax deduction or credit for contributions to the state plan. NJBEST had previously been criticized for not offering a tax benefit as one of the perks of investing.
Now, New Jersey taxpayers with gross income of $200,000 or less can qualify for a state income tax deduction of up to $10,000 per taxpayer for contributions to the plan. That’s a deduction of up to $20,000 for a married couple filing a joint tax return.
It offers a few other benefits. Starting in 2021, savers with household income of under $75,000 were able to get a one-time $750 matching grant for initial deposits on new accounts. Plus, students with accounts who attend a New Jersey college or university can receive a tax-free scholarship of up to $3,000.
While the new tax break is welcome news, some advisers say it isn’t enough to put NJBEST on their recommended list because of higher-than-average fees and limited investment selections.
“Changes enacted for 2022 will certainly help improve the NJBEST 529 plan, which is only rated as neutral by Morningstar,” said Dawn Brown, a certified financial planner with Peapack Private Wealth Management in New Providence. “The neutral rating is an upgrade from 2019 when it was rated negative – in other words, do not invest.”
Brown said NJBEST is still more expensive than other states’ plans.
“NJBEST direct plan fees range between 0.14% and 0.81%, with fees up to 2.21% for the advisor-sold plan,” she said, noting that the plan’s investment choices are more limited than other plans. “A wider selection could help reduce the fees in the plan.”
William Vaughan, a certified financial planner with RegentAtlantic in Morristown, said the high fees and limited investment selection have led his firm to recommend their clients not use the plan.
He said he’s not a fan of the plan’s “opaque, actively-managed Franklin Templeton funds,” while the expenses “leave something to be desired.”
NJBEST doesn’t see it that way, saying its plan is competitive with others on the market.
Spokeswoman Jennifer Azzarano said the NJBEST plan fees are in line with those of similar direct-sold 529 programs offered in other states, pointing to this table as a comparison.
But SavingForCollege.com, a 529 plan resource, compared the fees of all direct-sold (not adviser-sold) state plans in September 2021 for an account with a $10,000 balance over 10 years. It used each plan’s most expensive investment option for the comparison.
It found the Michigan plan would cost $160, Utah would cost $631 and New Jersey would cost $1,013.
In response to the data, Azzarano said less than 1% of NJBEST account holders have selected the highest-priced investment option cited in the study.
Azzarano also said residents who invest elsewhere would not be eligible for some the plan-specific benefits.
“Investments in other states’ 529 plans are not eligible for either the dollar-for-dollar state grant to match up to $750 of the initial contribution to a new NJBEST account, nor the state income tax deduction for up to $10,000 in annual contributions to an NJBEST account,” she said.
That’s not enough to win over some advisers.
Vaughan said he recommends the Michigan 529 plan because it has an all-in cost ranging from 0.065% to 0.105% annually.
“That’s about one-fifth the expense of the NJBEST plan,” Vaughan said, noting that Michigan’s plan uses index funds and builds its aged-based allocations in a more diversified manner than NJBEST. “We also like the Utah 529 plan because it has similarly low-cost, index-based, diversified portfolios.”
He said the Utah plan also has an “attractive” fixed interest option for students who need principal protection as they get closer to freshman year.
Brown said she likes the Michigan plan because of its low fees and wider investment selection.
“Though the fund is managed by TIAA-CREF, it includes investments from Vanguard, iShares and Schwab. Morningstar rates it a Gold plan,” she said.
There is a way to take advantage of the new tax break without marrying yourself to NJBEST for all of your college saving years.
“For our clients that meet the income limits, we are advising them to make initial contributions to the New Jersey 529 plan to take advantage of the tax deduction and roll over the balance to other 529 plans that have lower costs,” Vaughan said.
For a side-by-side comparison of different state 529 plans, try SavingForCollege.com’s comparison tool.
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Karin Price Mueller may be reached at KPriceMueller@NJAdvanceMedia.com. Follow her on Twitter @KPMueller