Morningstar released its annual list of the five best and five worst 529 college savings plans on Wednesday. Past favorites Utah Educational Savings and Nebraska College Savings dropped out of the top five, not because they got worse, but because other plans got better.
As usual, California’s ScholarShare 529 plan made neither list.
“It’s in the middle. It’s neither here nor there,” says Morningstar analyst Marta Norton. “It has some of the weaknesses we are bothered by in 529 land, along with some of the things you want to see.”
Named after a section of the Internal Revenue Code, 529 plans are state-sponsored programs that provide federal tax benefits for college savings. You can set them up for your kids, grandkids, other loved ones or yourself. There are no income limits, and most plans let you contribute large six-figure sums.
You get no federal tax deduction for money you put into the plan, but the money grows tax-free and remains tax-free when you take it out, as long as it’s used for qualified higher education expenses at almost any public or private college in the country. States also exempt earnings and qualified withdrawals from state income taxes.