[My monthly column at Physician Money Digest discusses the recent changes to the Utah Educational Savings Plan.  I admit I'm a little biased, but I thought it was the best plan in the country BEFORE the recent changes.  Now there are even more options, including 6 DFA funds and 6 new Vanguard funds, and even lower expenses.  I also include a guide for how to decide which 529 to use for your given state.]

One of the best ways to save for college is a 529 plan.

Like a Roth IRA, an investor contributes up to $14,000 per year in after-tax money to the plan and the money grows and is withdrawn tax-free, as long as it is spent on approved educational expenses.

The Utah Educational Savings Plan (UESP), the 529 savings plan for the state of Utah, is a perennial favorite among investors. Over the years it has shown exceptional management, quality customer service, low and ever-decreasing costs, excellent investing options and a decent tax break for in-state residents.

Non-resident investors, especially those whose home state 529 programs don’t offer a significant state tax break, routinely flock to Utah’s plan to save for college. The UESP just announced several new changes to the plan that make it even better.

3 Changes to Utah's 529 Plan that Make it Even Better

#1 Lower administrative fees

The UESP had been charging an administrative asset fee of 0.15% to 0.20%. This fee has been reduced an average of 10% to between 0.14% and 0.18% for almost all of its investment options, although it remains at 0.20% for one of the most popular options, the customized static option.

UESP also charges a maintenance fee of $3 per $1,000 invested up to a maximum of $15 per account per year. This fee is unchanged, but easily can be avoided if you’re willing to receive your quarterly statements online (or if you are a Utah resident).

While these slightly lower fees won’t make a huge difference in the long run, it does show the commitment of the UESP folks to passing its savings on to you.

#2 Two new static investment options

The Utah plan offers four age-based asset allocation models (aggressive growth, growth, moderate and conservative) that become less aggressive as the child approached the college years. UESP also offers six static asset allocation models (All-equity 30% international, all-equity 10% international, S&P 500, 100% bonds, a bank savings account and the Utah Public Treasurer’s Investment Fund.)

UESP is now adding two more static options: one is 70% equity and the other is 20% equity. The plan will continue to offer the two customizable options, one age-based and one static, where investors who like to be in direct control of their investments can choose exactly what they want to invest in.

#3 New funds

UESP is also adding a total of 12 new funds to the plan, all from passive investing giants Vanguard and Dimensional Fund Advisors (DFA). The Vanguard funds include Value Index, Growth Index, Small Cap Value Index, Small Cap Growth Index, Emerging Markets Index, and Short-term Bond Index Funds. The DFA funds include the Global Equity, US Large Cap Value, US Small Cap Value, Real Estate Securities, International Value and One-Year Fixed Income Portfolios.

The addition of the DFA funds is particularly exciting for do-it-yourself investors, who are generally denied access to these excellent funds unless they’re willing to hire a financial advisor. One of the best funds from DFA, the passively-managed US Small Cap Value Fund, has outperformed its closest competitor, the index-hugging Vanguard Small Cap Value Index Fund, by nearly 1% a year for the last decade.

The Vanguard fund is no slouch either, having outperformed 64% of its peers over the last 10 years, but the DFA fund has outperformed 86% of all small cap value funds.

The addition of a real estate fund is also a welcome addition since the UESP did not previously have one. Not all DFA funds have outperformed their Vanguard counterparts, but investors now get to choose from a menu of funds from the best two mutual fund providers inside the lowest cost plan in the country.

Utah residents also get a 5% tax credit on annual contributions up to $1,840 ($3,680 if married) per child. As a Utah resident with three children, contributing $11,040 to the UESP lowers my tax bill by $552 per year.

How to choose a 529 plan

Some investors are unclear about how to choose a 529 plan for college savings. The choice for many investors, however, is really quite obvious, as shown in the following chart.

If you live in Utah, you should use the UESP. You should also use the UESP if you live in a no-income-tax state, a state that doesn’t offer a 529 tax break or a tax parity state. This means residents of 21 states should be exclusively using the Utah 529 plan.

Those in other states — especially those where the entire contribution is deductible or where excess contributions can be carried forward indefinitely — should use their own state plans. However, you may consider rolling those funds over to the UESP at a later date. While 529 plans allow you to do this once a year, there may be fees involved and some states charge a recapture tax when you roll money out of their state 529.

Other options

If you are not obtaining a state tax break, you plan to save less than $2,000 per year per child, and you have an income under $110,000 ($220,000 married), then you might also consider using a Coverdell Educational Savings Account. Low cost options are available directly through mutual fund providers such as Vanguard, without the admittedly low UESP administrative fees. However, the income and contribution limitations will cause most doctors to choose a 529 plan instead.

There are other 529s that are almost as good as the UESP. Some of the better ones include those from Nevada, Ohio, New York, Illinois, Wisconsin, California and Michigan. As these plans continue to improve in order to compete for investor dollars, we should continue to see lower costs and improved investment options as the years go by.