529

[NICUfello]

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I have 2 young boys (under 3), that I would like to put some money away for their college. I have read the State run (some people recommend the Utah plan) vs Vanguard.

Anybody have any thoughts here?

I want to start two different account. I am looking to put $500 in each account, for each kid.

Thank you

 

[krl7044]

Utah is a great plan. One concern is that high risk portfolio inside a 529 can crash, thereby negating any tax benefits from making tax-free withdrawals, and a very conservative allocation might not warrant using a 529 plan (again because of a very low return that again won't take advantage of tax free withdrawals). Some plans have 'tapers' that start aggressive and then get conservative, but this type of strategy can also get 'stuck' in a crash. You can pass the account to a sibling, but that would negate the purpose of opening one in the first place. To be realistic, $500 a year even over 20 years does not amount to very much considering that tuition will grow way above inflation. I'd consider using a 529 plan together with several other strategies (depending on your situation). Another concern is whether you are maxing out all of your own retirement plans - 529 plan funding should probably be the last item on the agenda after you've done everything to maximize your own retirement savings. I'm not against 529 plans - they are a tool just like any other investment or account, and should be used wisely as part of a long-term financial/investment plan.

 

[Information Underload]

Utah's 529 plan is run by Vanguard. Are you in a state with a state income tax that allows deductions of 529? That is their main benefit. New York has a nice 529 plan, as does Nevada. More often than not, you're better off using your state's own 529 plan if you can deduct contributions from your state taxes than using another state's perhaps better run 529 plan.

I'd make sure you're maximing your 401k and ROTH accounts before worrying about a 529.

 

[NICUfello]

KRL7044

Thank you. The local CFO at a large corp is my long time child hood friend, and had recommended the Utah plan.

$500 a month/per kid=$1000 a month, not $500 a year 😛

I am not eligible for retirement at my office till I am there 1 year. So aside from Roth this year, I am just saving cash, as I can't do the 17,500$ 401k etc...

 

[NICUfello]

Utah's 529 plan is run by Vanguard. Are you in a state with a state income tax that allows deductions of 529? That is their main benefit. New York has a nice 529 plan, as does Nevada. More often than not, you're better off using your state's own 529 plan if you can deduct contributions from your state taxes than using another state's perhaps better run 529 plan.

I'd make sure you're maximing your 401k and ROTH accounts before worrying about a 529.

I am in CA. Roth is maxed out. Office has no 401k I am eligible for till 07/2015....

 

[Information Underload]

California has a lowsy tax system and allows no deductions for savings in a 529 plan, which seems par for the course with them given their tax rates. The only benefit to a 529 plan in California is that if you do use the money to pay for educational expenses, you don't pay taxes on the gains (the same as if you used any other 529 plan). They do hit you with a fine if you take out a non-qualified distribution in addition to federal penalties. I don't know if I'd be rushing to invest in a 529 plan from California. You are likely just as well off investing in tax-efficient options in a taxable account (e.g. total market stocks and I-bonds or California Muni bonds).

 

[NICUfello]

California has a lowsy tax system and allows no deductions for savings in a 529 plan, which seems par for the course with them given their tax rates. The only benefit to a 529 plan in California is that if you do use the money to pay for educational expenses, you don't pay taxes on the gains (the same as if you used any other 529 plan). They do hit you with a fine if you take out a non-qualified distribution in addition to federal penalties. I don't know if I'd be rushing to invest in a 529 plan from California. You are likely just as well off investing in tax-efficient options in a taxable account (e.g. total market stocks and I-bonds or California Muni bonds).

Thank you. Lot of things about CA sux. Thus I was one foot out the door with a different job...but I am here for a while longer.

Your input is very appreciated.

 

[QofQuimica]

I'm planning to do my niece's 529 though UT's 529 plan and contribute $500/mo also. I'm in FL, which has both a pre-paid tuition program (basically an overpriced 529 with a guaranteed return) and a regular 529. We have no state income tax, so there is no benefit at all to using one of the FL plans over the UT plan. As someone else already said, the UT plan gives you access to Vanguard funds, so that's not a decision you have to make. It also gives you access to DFA funds, which you can't normally get without going through an advisor.

If you haven't already seen this article on choosing a 529 by WCI, you might find it helpful: http://www.hcplive.com/physicians-money-digest/personal-finance/The-Best-529-in-The-Country-Dahle

 

[NICUfello]

^^Appreciate the link!

 

[Dirt]

Just an FYI, the minimum initial contribution for vanguard is $3K. Not sure of other similar minimums.

 

[krl7044]

Utah's 529 plan is run by Vanguard. Are you in a state with a state income tax that allows deductions of 529? That is their main benefit. New York has a nice 529 plan, as does Nevada. More often than not, you're better off using your state's own 529 plan if you can deduct contributions from your state taxes than using another state's perhaps better run 529 plan.

I'd make sure you're maximing your 401k and ROTH accounts before worrying about a 529.

The main benefit is actually tax-free withdrawals for higher education expenses. State tax deduction is tiny peanuts. Otherwise, any brokerage account would work for college savings. And a 529 plan actually makes more sense for high amounts - low amounts the tax savings you will get are probably not going to be there to justify a 529 plan.

I actually prefer using individual municipal bonds for higher education expenses, specifically because using stocks for something that is very time sensitive is not the best idea (that is, you can only use the money within a window of 4 years, and possibly longer if the child will be going to graduate school).

As I indicated in the above post, just dumping money into a 529 plan's default portfolio might result in a situation (which happened before many times over) in which the tax savings from tax-free withdrawals are negated by the fact that your account value has fallen because of a stock market crash, thereby negating the main benefit of a 529 plan. Or the portfolio becomes so conservative that a CD would be better (so you lose money because of opportunity cost).

The downside is that the money can only be used for higher education expenses. That's why if you have your own brokerage account, not only will you get lower costing funds (Utah charge a fee to get access to the funds, so going directly to Vanguard will be cheaper), but the money could be used for anything else as well as higher education. And for something that is very time specific (you know for sure your children will go to college at 18-19), I like to use 'target date' individual bonds - you know for sure how much money you will get and when, and the principal is protected.

 

[NICUfello]

Just an FYI, the minimum initial contribution for vanguard is $3K. Not sure of other similar minimums.

Yeah I went through their site. It seems that they are pushign the Nevada 529, which is their "own"

 

[Information Underload]

The main benefit is actually tax-free withdrawals for higher education expenses. State tax deduction is tiny peanuts. Otherwise, any brokerage account would work for college savings. And a 529 plan actually makes more sense for high amounts - low amounts the tax savings you will get are probably not going to be there to justify a 529 plan.

Potentially. Like you said, it depends on the amount you have invested. Most bond funds are returning peanuts, anyway, so withdrawing money tax free is only really beneficial if you have enough in the account over a long enough period of time that you get some actual capitalization. Then you run into the whole dilemma of 1) whether the kids go to college and 2) whether they end up getting a full-ride to go somewhere else and then what to do with the money.

 

[QofQuimica]

Potentially. Like you said, it depends on the amount you have invested. Most bond funds are returning peanuts, anyway, so withdrawing money tax free is only really beneficial if you have enough in the account over a long enough period of time that you get some actual capitalization. Then you run into the whole dilemma of 1) whether the kids go to college and 2) whether they end up getting a full-ride to go somewhere else and then what to do with the money.

Even if they get a full ride somewhere, you can still use the money to pay for non-tuition school expenses, for grad school, etc. Or you can transfer the account to another child. Or you can just withdraw the money for non-educational expenses, although then it won't be tax-free.

 

[krl7044]

It always makes sense to do a back of the envelope calculation for stuff like that (I'm an excel modeling junkie), that's why there isn't a single blanket statement that can be made about 529s, and each individual situation has to be looked at separately. One rule of thumb though is to invest in a 529 only after your own retirement goals have been met. Better pay out those high interest student loans first.

 

[NICUfello]

^^

Makes sense, for sure!

 

[LADoc00]

Utah, Nevada and West VA are good 529B plans although California's has all the sudden become competitive. I was curious about the person putting 500/mo into their niece's plan. That is crazy generous...I assume you have no kids or something?

 

[QofQuimica]

Utah, Nevada and West VA are good 529B plans although California's has all the sudden become competitive. I was curious about the person putting 500/mo into their niece's plan. That is crazy generous...I assume you have no kids or something?

Correct, I do not have my own kids. Though I think of my niece as mine.