Hello $wanigans! I need a little help from you today. As you may be aware, Lucy and I just had our second child…born on April Fools Day…no joke! So time to give some thought to the good old 529 plan again. And what better day to talk about 529s than on 5/29?
I should be a little more regular and routine in analyzing 529 plans as I learned some new things this go around. For our first born, Cygnet #1, we opened a Utah 529 plan which at the time in 2014 had the lowest fees and best investment option for us which included static index investments (Vanguard funds) in US and International equities. This basically mirrors our retirement investment selections with 65% domestic and 35% international.
If there were good tax advantages of investing in our own state 529 plan we probably would have done so, but North Carolina adjusted the state tax code effective January 1, 2014 and the deduction for 529 plan contributions went away…what timing! So Utah’s was the next best option for us.
I chose static investments rather than age-based as I want control in how and when the investment choices change to a more stable and safe investment…if I want to ever change it at all. I’m completely comfortable holding all equities for a while though since we have such a long time until he’s ready for college.
529 Plan Review
So, like I said, I probably should do a more regular review of 529 plans as the state offerings are constantly in flux. Whether changing investment managers (e.g. active to index, etc.), investments options (e.g. static, age-based, or allocation options) or adjusting the level of fees, some states seem to be constantly jockeying back and forth to offer better and better choices.
While Utah was the best back in 2014, it appears New York now has a very competitive offering at lower fees and it may suit me better now. It has similar investments options as Utah (Vanguard US and Int’l index funds), but at a lower cost. The reason I need to monitor more closely is that switching among states is allowed. Maybe it is time I take this offer up?
Federal tax law allows the rollover of any or all of a 529 plan to another 529 plan once in any 12-month period. Most state 529 plans follow the federal tax-free treatment and fortunately both New York and Utah are among those states. Since I am not resident in either state and didn’t benefit from deducting contributions on the respective state tax return, I wouldn’t be subject to any recapture of tax savings or penalties.
Plus, I checked with both states and neither charge any processing fees for incoming or outgoing rollovers. So theoretically, I could change back and forth between the two state plans (and perhaps other states if their 529 plan offerings improve) fee- and tax-free in the future as investment fees improve at one versus the other, etc., so long as I wait 12 months in between.
529 Plan Considerations for Cygnet #2
In my review of 529 plans for Cygnet #2, I had the following primary criteria:
- Low Fees: 529 plans are unique in that they need to be bought through the individual state who each have their own platform, but then export the management of the plans. As such, fees can come in many different shapes and sizes including enrollment / application fees, account maintenance fees, program management fees and underlying investment fees. This can obviously be annoying as hell, nobody likes to pay fees and be nickle and dimed, so I told Google to point me in the direction of the lowest fee plans!
- Vanguard Funds: My inclination is to look solely for Vanguard funds based on being the traditional leader in low cost funds, but I am open to other index fund managers as well since all index funds basically operate in the same manner in how they track the underlying index.
- Investment Selection: I prefer to directly manage the investment selections and diversity so I shy away from age-based options. Unfortunately, it is difficult finding 529 plans that offer much flexibility in this regard and allocation percentages to US vs International equities can sometimes be rigid. Why can’t this be as simple and easy as buying funds through my IRA?!
Here comes the dilemma I need your help with! And it is a two-part dilemma…
1. Utah or New York?
Cygnet #1’s 529 plan is with Utah right now. I’d prefer to have both kiddos’ 529 plans in the same spot for ease in tracking and also for the ease of potential transfers between the two in the future.
While New York’s 529 plan has materially similar investment offerings at a lower cost, is it worth the hassle of a plan transfer?
The fees I pay in Utah include 20 bps for program management along with the underlying investment expense ratio which averages to 4.5 bps across the three index funds I own (large cap, small cap, and international). With roughly $80,000 in the account today, that equates to $196 per year in fees. And this $80,000 for Cygnet #1 is what I consider to be a fully funded 529 plan.
Alternatively, New York’s expense structure is much easier and better. They charge a 16 bps flat program manager fee which includes underlying fund expenses and there are no other fees. New York seems to have figured it out by avoiding nickle and dime-ing folks! On a comparable $80,000 fund, this would equate to $128 in fees per year, or $68 less than Utah each year.
2. 529 or Taxable Account?
The other dilemma I face is whether to save for college in a 529 plan or a standard taxable brokerage account?
There are a few primary considerations I have here. First, the 529 plan has its tax benefits. Namely, the investments grow tax free. As I mentioned before, there are no tax benefits in North Carolina in terms of deductions to income tax of contributions, but some states offer this as well.
Alternatively, if I retire in 5-7 years, my taxable income will likely drop to the 15% tax bracket or lower, and therefore I’d owe no federal capital gains tax on the brokerage account anyway, thereby growing tax free in a similar manner as the 529 plan. Sure, I’d pay some tax in the meantime on dividends from the investments during the 5-7 years before I retire, but not too much.
The benefit: by keeping it in a brokerage account, I’d maintain ultimately flexibility! Say my cygnets don’t end up going to college? Or what if they find low cost ways to “hack the cost of college” such as CLEP tests, dual enrollment during high school for college credit, taking some community college classes in the summer that are transferable to their full-time university, and/or graduate in three years?
In a way, I hacked the cost of college without even knowing it at the time as I took advantage of each and every one of those above mentioned examples…so I wouldn’t put it past my kiddos to do the same. And that would mean I would risk over-funding their 529 plans. Unless of course they went on to get an advanced degree…which I also did.
Oh what a dilemma!?
If I chose not to fund a 529 plan for Cygnet #2, the solution could be opening an account for him and then transferring half of Cygnet #1’s assets to Cygnet #2. This would keep things fair and even between the two, and ~$40,000 in each of their respective plans would help fund approximately half of their respective college costs at an in-state public university by the time their 18 per my earlier estimates.
Please let me know your thoughts on my 529 plan dilemma. Is there anything I may have missed or failed to consider? Where do you have your 529 plan and why?
You can also now see my conclusion on opening a 529 plan.
Thanks for taking a look!
The Green Swan
Some Good 529 Plan Resources: