More investors are turning to robo-advisors each year for good reason.

From their low fees and advanced technology, to their tax efficient strategies and set-it-and-forget-it investment methodology – many investors are moving towards robo-advisors.

With so many investors moving in the direction of robo-advisors, you may be thinking of utilizing a robo-advisor yourself.

You may even be interested in using a robo-advisor with a 529 plan for college savings.

The question is…

Which robo-advisors are best for 529 plans and college savings?

I’ve done many robo-advisor reviews this year, and I learned something fascinating.

What did I learn?

I learned that – while many investors are turning to robo-advisors – many robo-advisors do not offer 529 plan college savings accounts. 

In fact, almost all the well-known robo-advisors fail to offer 529 plan college savings accounts.

Well known robo-advisors, such as Betterment, Wealthsimple, and M1 Finance, don’t offer a 529 plan option.

But…

Luckily for you, there is one robo-advisor out there.

That robo-advisor is…

Wealthfront.

Read on to learn more about Wealthfront’s 529 plan option, as well as two alternative ideas for your college savings goals.

Using Wealthfront for your college savings 529 plan

Wealthfront is a Silicon Valley based company that was one of the first mainstream robo-advisors.

The company has been competing for years with Betterment, which was also one of the first mainstream robo-advisors.

Betterment, however, does not offer a 529 plan, so you need not worry about Betterment if you use a 529 plan.

How does Wealthfront’s 529 plan work?

Wealthfront uses an algorithm to invest your money.

The algorithm is comprised of questions to help understand your risk tolerance.

Below is what the process looks like.

You will start with questions about yourself and your family.

You will proceed to questions about college, such as how long until your child starts, how many children, what type of schooling you are saving for, etc.

Finally, you will be presented with an allocation suggestion similar to the one above.

Wealthfront’s technology and fees for college saving

Wealthfront has one of the best platforms in terms of technology and offers a powerful tool called, Path.

Path can help you calculate future college expenses and help you track and try to attain those goals.

It can help you project the cost of college, calculate your financial aide, and even show you how much you need to save to achieve these goals.  While Path can help you with the plan, Wealthfront also has a low fee for its 529 plans.

In fact, according to Wealthfront, the all-in cost of their 529 plan is no more than 0.46%.

This is quite a low fee to pay for a 529 plan in comparison to mutual funds.

Another interesting note is that the Wealthfront 529 is sponsored by the state of Nevada.

Why is this important?

The state of Nevada includes a contribution limit of up to $370,000 for each of your children.

Since this is a 529 plan, you can even change the beneficiaries of your plan if you end up saving too much inside the account.  This way, if you end up saving too much in your 529 and have another child, you can change the beneficiary to your next child to pay for that child’s expenses.

Wealthfront’s investments

Wealthfront is a robo-advisor with advanced technology for asset allocation strategies – as your child approaches college, Wealthfont will reduce the risk the account takes.

Why is important?

If the stock market crashes as your child gets closer to college age, you don’t want your portfolio to lose too much value.

For this reason, it is important to reduce the volatility of your 529 plan investment as your child nears college age.

For example…

Imagine your child is one year away from college, the money shouldn’t be invested 100% in the stock market as you will be using this money soon.  You may wish to utilize less risky asset classes, such as bonds.

Wealthfront will automatically reduce the risk of your portfolio as your child gets closer to college age.

Even though Wealthfront is the only robo-advisor offering a 529 plan, it is also one of the better robo-advisors.

Above you can see the allocation suggested by Wealthfront after I input my information.

The majority of the money is invested in stocks, with no cash allocation and bit more than a third in bonds.

As the child gets closer to college, the percentage of bonds will rise and the percentage of stocks will fall.

By the way, don’t forget to read Stock Streets 2018 Robo-Advisor Award Winners!  Click the button below.

Alternatives to a college savings account

Using a robo-advisor for college savings with a taxable account or Roth IRA

Since only one robo-advisor offers a 529 plan…are there other options for your child’s college savings?

The answer is…

…Yes, there are.

You don’t NEED to invest in a 529 plan for college savings.

You can invest in a Roth IRA, or even a taxable brokerage account.

More on how to do this later.

But first…

We will go over some alternative robo-advisors that compete with Wealthfront

Robo-advisors competing with Wealthfront

Below is a list of other robo-advisors that compete with Wealthfront.  While these companies do not have 529 plans, you will see there are other robo-advisors offering quality platforms.  Some robo-advisors are less expensive than Wealthfront, while some are more expensive.

Again, these other companies don’t offer 529 plan.

Use Acorns to automate investing

Acorns is a robo-advisor that can help you automate your investing.

This can be great, especially if you are having trouble saving for your child’s college.

The company is more for supplemental savings,  and should not be used as your only funding mechanism for college.

Acorns does NOT have a 529 plan, but you can use a taxable brokerage account or a Roth IRA to save with Acorns.

How does Acorns work?

Acorns will round up your purchases to the nearest $1.

For example…

If you purchase a coffee at Starbucks with an account linked to Acorns for $2.75, Acorns will take the remaining 25 cents and save it into an investment account.

This will happen every time you spend.

It is a way to trick yourself to invest more money, and it can work well if you have trouble saving for college education for your child.

You may also be interested in Acorns since they will automatically add $5 to your account when you link your bank account.

Interested in reading more about using Acorns to save for college?  You can click here to read my article about using Acrons to help supplement college savings.

Using a taxable brokerage account or a Roth IRA to for college savings.

When it comes to paying qualified college expenses, a taxable brokerage account isn’t as tax efficient as a 529 since you will need to pay capital gains tax on your investment profits.

However, some robo-advisors offer advanced technology that reduces your taxable gains (this is called tax loss harvesting).

Also, Roth IRA’s don’t require you to pay any taxes on the money you added to your account.

This means if you added $20,000 to your Roth IRA over a few years, you can withdraw that $20,000 and pay no taxes.

However…

If the $20,000 grows to $50,000, you will owe taxes on the growth if you distribute before age 59 1/2, which is $30,000 that will be taxed ($50,000 – $20,000).

Another caveat…

If you are over age 59 ½ and the account has been established 5 years, you will not pay taxes on gains.

What does this mean?

It means if you will be older than 59 ½ when your child goes to college, you can distribute any money in your Roth IRA without paying taxes, as long as it has been established 5 years.

Should you use a Roth IRA or taxable brokerage account for college savings?

It really depends on your unique situation.

In the end, a 529 plan is best for taxes as long as you don’t overfund your plan.

Conclusion – The best robo-advisor for college savings and 529 plans

If you’re looking for a robo-advisor to open a 529 plan and invest for your child’s college education, Wealtfront is the only robo-advisor offering these options.

Wealthfront is a top-tier robo-advisor – you can rest assured the company is a strong option for your investments.  They have great technology and low fees – it is a perfect match for many college savers.

If you decide against Wealthfront, or against using a 529 plan to save for college expenses, you can always look into a Roth IRA or a taxable brokerage account.  If you go this route, you will have many robo-advisors to choose from.

I hope this article answered your 529 plan robo-advisor quesitons.

Now..

I want to hear from you.

Do you use a robo-advisor for your 529 plan?

Have you made a decision as to how you will fund your child’s education?

Disclaimer: These are the ideas and opinions of the author.  The author is not responsible for the actions of those who read the posts on this blog.  Each individual reader has a unique situation and unique needs.  This blog is not intended to solve those unique situations of the readers.  This blog is not liable for decisions made by the readers of this blog.

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