The Best 529 Plans for 2025

Key Takeaways

• 529 Education Saving Plans are tax-advantaged investment vehicles in which your money grows tax-free.
• Depending on the level of tax benefit your state’s plan offers, it may be worthwhile to look out of state for a 529 Plan.
• In addition to considering governing entities that oversee the plan, Morningstar evaluates its 529 Ratings on the asset-allocation process, reasonable investment processes, good fund selection, and monitoring processes.
• Because of a major methodology update in 2024, Morningstar had three plans added to the Gold tier, including Alaska’s T. Rowe Price College Savings Plan, Massachusetts U.Fund College Investing Plan, and Illinois Bright Start Direct-Sold Plan.
• An investor can switch plans once every 12 months without any tax consequences.

Margaret Giles: Hi, I’m Margaret Giles with Morningstar. 529 education savings plans offer a tax-advantaged way to save for college and other education expenses. Here today to discuss the 529 plans that earn Morningstar’s top Medalist Rating, and the qualities that set them apart, is Hyunmin Kim. Hyunmin is an analyst with Morningstar Research Services.

And a quick note to viewers before we begin, we’re including a link to Morningstar’s 529 plan ratings in the transcript of this video.

Well, thanks for being here today, Hyunmin.

Hyunmin Kim: Thank you.

What Are 529 Plans?

Giles: All right. So I want to start with the basics before we get into the ratings. What are 529 plans, and how do they work?

Kim: 529 Education Savings Plans are tax-advantaged investment vehicles. So it’s kind of like how you would use a brokerage account, but they have limited options. The benefit of that is that your money grows tax-free. And then when you use the money for qualified education expenses like tuition or room and board, in some cases, then you don’t have to pay taxes on your capital gains. Usually it offers an investment menu that includes some sort of target date-like option. So it would start with more stocks or risk assets, and then as your beneficiary grows and gets closer to their college enrollment, the portfolio would automatically derisk. Or you can also build your own portfolio of different fund options.

Should Investors Choose In-State 529 Plans?

Giles: 529 plans are offered by state. Are there benefits for an investor that chooses to stay in the state that they live in? Or is it better for them to look out of state?

Kim: All 529 plans come with the federal level tax benefits, but depending on the state that issues the 529 plan, it could come with different levels of tax credit or tax deduction. So if your state offers a generous tax benefit, then it would make sense for you to stay in state in terms of 529 plans. But if you live in a state or file taxes in a state that does not offer that good of a tax benefit for 529s, then it would make sense for you to look around.

Giles: OK, so state-by-state basis.

Kim: Yeah.

Traits of Morningstar’s Top Rated 529 Plans

Giles: Morningstar rates 529 plans on an annual basis. What are the traits that you look for?

Kim: The way we evaluate 529 plans is similar to how we look at mutual funds, but with added considerations for 529-specific things. So we would look for a very robust and reputable asset-allocation process, reasonable investment processes, good fund selection and monitoring processes. And for 529s, we look at the state entities or the governing entities that oversee the 529 plan. So they get a separate evaluation. And then, as we do for all Morningstar valuations, we look for reasonable, ideally low, fees.

How Morningstar’s Rating Methodology Update Led to 529 Plan Upgrades

Giles: Absolutely. So this time last year, there were two plans, 529 plans, that had received Gold ratings. But now there are five plans that receive that designation. So what’s changed?

Kim: There was a major methodology update in 2024 that shuffled the ratings a little bit. It should not have made too dramatic of a change, but it did upgrade three more plans into that Gold tier. So the very high level summary of the changes is that we shifted the weighting of each pillar. So the Process Pillar used to take up 30% of the overall score. Now it’s 50%. So we’re really focusing on whether the plan provides quality options for the end investors. And then the remaining 50% goes to the People and Parent Pillars, so 25-25. And then for the Price Pillar, we used to rate everyone, or rank everyone, and then cut quintiles. But now we are using a standard-deviation-based measure, so kind of a modified z-score to make sure that we focus more on the outliers than penalize reasonably cheap plans. So lots of changes there, and that’s probably a major reason why we saw some upgrades.

What Makes Utah’s My529 Plan a Standout?

Giles: OK, so let’s talk about some specific plans. I want to start with Utah’s my529 plan, which is a perennial favorite. What sets it apart?

Kim: Utah’s my529 plan has been setting industry standards for many years now. And every year we go into the ratings process with a critical eye. They continue to impress us. So they have offered very cost-effective portfolios. They’re very proactive about lowering fees where they can. They have excellent state oversight, so multiple layers of independent audits when it comes to making investment decisions. And they have also pioneered some, I would say, innovation. I’m a bit allergic to that word, but I will use that for my529 in that they offer customized portfolios for both retail investors and advisors. And on top of that, they put in behavioral nudges so that the investors who are using the customized options don’t end up making overly risky or overly expensive portfolios. So all around very good investment processes, oversight, and that extra alpha element.

Benefits to the Pennsylvania 529 Investment Plan

Giles: So the next incumbent is the Pennsylvania 529 Investment Plan. What do you like about it?

Kim: Pennsylvania is a state that really impresses us with the robust state oversight. The governing entity for the Pennsylvania 529 plan has shown very aggressive advocacy for their end investor in negotiating lower fees and negotiating favorable terms with their investment providers. And that results in quality offerings for the end investors. So that was the driver for the Gold rating for Pennsylvania.

Which Three 529 Plans Were Upgraded to Gold and Why?

Giles: Great. So three plans were upgraded to Gold in this past round of ratings. Can you break down how they earned that distinction? Let’s start with Alaska’s T. Rowe Price College Savings Plan and the Massachusetts U.Fund College Investing Plan.

Kim: Alaska’s plan is managed by T. Rowe Price and Massachusetts by Fidelity. And both firms offer very quality offerings that kind of helped upgrade the plans with the new methodology because the new methodology puts more emphasis in process and the investment manager compared to the previous ratings. So, plans that offer very good, quality research, have very robust research teams backing the product would have gotten an upgrade. And Fidelity and T. Rowe Price are two examples of that.

Giles: Great. So there’s one more plan that rounds out this group of Gold-rated 529s. And that’s Illinois Bright Start Direct-Sold Plan, not to be confused with the Advisor version, right? What led to its upgrade?

Kim: Illinois' Bright Start program is not managed by an external program manager. It’s in-house. But the plan still earns a High Process because the team is very invested, very involved in the fund selection and monitoring process. The team is very mindful to keep the open architecture so they don’t confine themselves to a single fund manager. They would look at the entire universe to make sure that they have quality options in each asset class. And the governing entity for Illinois 529 plans have shown great oversight in terms of investment. In addition, the state has been a great advocate for investors in terms of lowering the fees.

Can an Investor Switch 529 Plans?

Giles: Great. And relevant. We’re in Chicago. I’m certainly thinking about the Illinois side of things.

So to wrap up, let’s say an investor is already in a 529 plan, but maybe it receives a Neutral or a Negative rating from Morningstar, lower end of the scale. Can they switch to another 529 plan? And is it worth switching?

Kim: Investors can roll over from one 529 plan to another one once a year, or once every 12 months, without any tax consequences. But if they were to roll over from one 529 plan to another more than once, then it could trigger a tax event. So you would have to be prudent about which plan you would roll over to. And then in considering whether to move 529 plans or not, you would have to look at the investment appeal of the other 529 plans, and most importantly, what type of state tax benefits you would be forgoing.

Giles: Absolutely. Well, thank you, Hyunmin, this is really helpful. And I appreciated the extra detail on these Gold-rated 529 plans.

Kim: Of course. Thank you.

Giles: All right. I’m Margaret Giles with Morningstar. Thanks for watching.

Watch The Best Ways to Generate Income in Retirement for more from Margaret Giles.