Last week’s blog talked about the various college savings vehicles you have to choose from. Today’s choice: Which 529 plan should you use?Very recently, Washington state, where I live, which closed its prepaid tuition plan (GET) to new investors last August, announced that it was not only planning on reopening GET but also establishing a brand new 529 savings plan. I’m excited to see what the savings plan looks like…maybe it’ll be good competition for the plan my girls are currently in! If you want to be able to better evaluate these two options, read on!
Choosing a 529 Plan
There are two basic types of 529 plans:
- Guarantees that you can cover tuition at state institutions without having to worry about possibly onerous inflation (expected to be 6% or so every year)
- Requires that you child go to a public in-state college or university to get the maximum benefit.* This does not guarantee admission.
- Most effective if you save very early, which means you’re committing your child to state university 18 years in advance.
- Covers only tuition, not other expenses, which also inflate.
- Your state might not offer this.
- Sometimes cost doesn’t provide much savings at all; requires analysis.
* There is another kind of prepaid plan: Private College 529 plan. It is a consortium of over 300 private colleges and universities, instead of your state’s public schools.
- Flexibility. You can use this money at any accredited institution in the US and some foreign.
- No guarantee that your investments will keep up with inflation. As with any investment, the account could possibly drop in value.
Considerations when choosing a Type of 529 Plan
Prepaid plans might give you more financial benefit, but in exchange for more restrictions. Think about these factors when deciding between these two types of 529 plans:
A lot of parents (me included!) worry, “What if my kid doesn’t want to remain in-state?” And what if you want to move states in the meantime? (Again, like me.) Do the restrictions of the prepaid plans make sense for you and your family, logistically and personality wise?
Assess your state’s schools. For example, I grew up in Virginia, where many state institutions are very well respected. Being “forced” to go to one of those would not have been an academic sacrifice.
Is it necessarily a bad thing to impose some restrictions on your child’s school selection, especially if your and her financial security is on the line?
Make sure the prepaid plan is actually a good deal financially; you’ll need to run the numbers.
If you cannot accept the limitations, then choose a savings plan. If you haven’t figured it out so far, in my case, I have a 529 savings plan for each of my girls. But several friends of mine in Virginia, whose families go back several generations there and have every intention of continuing the tradition, use Virginia’s prepaid tuition plan. Part of me envies their decisiveness!
Considerations when choosing a Specific 529 Savings Plan
Choosing a specific 529 savings plan can be boiled down to three major factors:
Cost: Both of the plan administration and investment choices. The cheaper the plan, the more money you keep for your child’s college. Much academic and industry research shows that low costs are the #1 predictor of better investment performance.
State tax break: If your state gives you a state tax break for contributions, this plan might be best for you, unless the costs are noticeably high or you plan to move out of state soon.
Age-based investment options: Even as a financial advisor, I want to “set it and forget it” when it comes to my child’s college savings. Look for a plan that has investment options that automatically get more conservative as your child approaches college age.
Find information on all 529 plans (savings and pre-paid) here: http://www.savingforcollege.com/college_savings_201/ (Consider yourself warned: there is a lot of information on this site. Don’t think you’re going to successfully browse it on a 10-minute coffee break.)
Some plans (though fewer by the day, it seems) have a small upfront fee to open an account. In my experience, you can often get that fee waived by searching the internet for a code or simply by directly asking the plan administrative staff to waive it.
A typical story… Mine.
I have two young daughters, so I’m squarely in the “saving” phase. When each of my daughters was born, I opened a Virginia 529 savings plan (the inVEST plan). My mother lived in Virginia at the time, and Virginia offers a state tax break for the first $4000 in contributions each year (no limit after you turn 70). I used to think of it as a guaranteed rate of return of around 6% (the state tax rate), at least for that first year. And the inVEST plan was reasonably priced and had the age-based plans that I wanted.
At that time, it seemed like there was no real consensus on who should own the 529 in terms of maximizing financial aid benefits, so we had my mother own it (she was the major contributor, after all, and would be 70 in not so many years). We somewhat arbitrarily capped total annual contributions to $4000 (get the full state tax break) because I knew I didn’t want to put all our college savings in such a restrictive account. Over the years, our contributions have waxed and waned, but Grandma kept plugging away along with frequent contributions from other family members.
About two years ago, we moved from Virginia to Washington state, and now Grandma has followed following us. Goodbye state tax break. The Virginia inVEST plan is okay for out of state residents, but there are other, better plans. We decided to open up new 529s in Utah; Washington state in fact had no available 529 plans at the time of my decision (their prepaid plan was suspended and no savings plan as yet exists). The Utah plan has some of the lowest administrative and investment costs and straightforward age-based investment options. My IT consultant brother also set one up for his daughter and, true to form, quickly found the web page that made it very easy for other people to contribute online or by check to his daughter’s account. That sort of ease of contribution should make it easier to involve the entire family.
We still have to decide what to do with the Virginia 529 plans. We can leave them where they are. It’s not as good a plan as Utah’s, but it’s pretty good. We could also transfer all the funds to the Utah plan, which would put the money in slightly better investments at lower cost, and importantly, simplify our accounting with only 1 plan for each kid. On the other hand, many states “take back” the state tax break they gave you if you ever roll the money out. I haven’t yet decided what we’ll do.
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