529 plans?

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Submitted by avidsaver on March 28, 2007 - 11:39pm

I'm posting this in the off topic forum hoping that I can get some feedback from anyone who has invested in a 529 plan for their kids' (or other relatives') college educations. What state are you invested in and why?

Submitted by Artifact on March 29, 2007 - 8:49am.

I have one existing 529 - the Nevada plan with Vanguard. I chose that one for 2 reasons: (1) I had existing accounts with Vanguard and (2) the fund had no restrictions of which colleges the money could be used for. The fund has done relatively well.

I am getting ready to start a second 529 for my younger child, but I will probably do this one with the California plan at Fidelity - I have switched most of my funds there since starting the first fund so it makes sense. This one has not been around long enough to really judge it's performance.

From what I have read/learned the biggest issues are whether you can use the money anywhere and if there are tax breaks in your state. California does not have any tax breaks for using the California 529 plan, so there is not a huge benefit to using that over another if you live here - some states do have tax breaks, so if you live in one of those states it is worth using the state 529.

I am sure there are others here who understand the whole thing a lot better than me though.

Submitted by avidsaver on March 29, 2007 - 9:11am.

Thanks. I do live in California, but I'm a little reluctant to invest it here because the plan is new and there are no tax breaks. Also, the fees are a bit higher than some other plans. But, I can't help but wonder whether, at some point, the state may create a tax break that I can take advantage of.

I feel like I've been PORING over so much information lately that I may be overdoing it at this point.

I think that I'm leaning towards Utah because the fees are lower and they have a Vanguard age-based fund, but I was also considering Michigan.

Another question: Can you move funds from state to state with no consequences?

Submitted by Artifact on March 29, 2007 - 9:18am.

I think the transfer limitation is that you can move the fund to a different state a maximum of 1 time per year - so in essence there is very little limitation.

Morningstar did a report on 529 plans not too long ago:


Utah ranked pretty well.

Submitted by one_muggle on March 29, 2007 - 12:58pm.

We ran into the same problem (living in CA) but selected the California 529 anyway because it was run by TIAA-CREF, whom I have accounts with and like (and the fees were low). This past year Fidelity took over the plan and actually lowered the fees. I have yet to recompare, but I found the comment that the fees were too high interesting, since they were among the lowest when I last did a thorough check (~18 months ago). It seems it might be time to do another round of invest-igation.

One thing to consider. If you have relatives in another state that will be contributing (like Grandma), you can setup a plan in that state and let them get a tax break--assuming the plan is otherwise comparable. I hold out hope (but not my breath) that California will get on board and let us write off the 529.

-one muggle

Submitted by avidsaver on March 29, 2007 - 2:59pm.

Thanks for that. Unfortunately, everyone lives here in California, so no tax breaks for us...

I should note that what I saw relative to the California fees was a sliding scale based on the type of fund in which the account was invested. So, on the high end, the fees could get to 1.something% and I wanted to keep it lower than that. I suppose that if I selected an index fund, the fee would be lower. It just seemed that overall, Utah, had low fees all around. It seems that the only company that states any opinion about best and worst funds is Morningstar, and Utah's been in the top 5 consistently.

I do hope that at some point CA will offer a tax break though.

Submitted by equalizer on March 29, 2007 - 4:44pm.

Forget the tax break hope, the state is so broke.

www.savingforcollege.com has some info, but it is not laid out clearly.  Most people are under the impression that you can only invest in their state plan, and have you to 
dig in to faqs to realize that isn't true.  How confusing. This is from the "best" place for info!?!  
   It appears that Fidelity CA plan has 0.5% expense rate, while the Utah plan has 0.30 to 0.40% rate.  Anyone care to verify that?


Submitted by avidsaver on March 29, 2007 - 4:53pm.

Yeah, I think that the savingforcollege site has good info, but they're also trying to get people to pay for subscriptions for even more info.

Submitted by Artifact on March 30, 2007 - 8:35am.

The California plan expense ratio varies - the standard index portfolio is .50%. They have actively managed portfolios that range from .72% to 1.09% and a social choice portfolio at .80%.

I am not sure exactly why - but the Fidelity portion of the expenxe is only .40% - the extra .10% is a "State Fee". That same fee is included in every one of the portfolios.

Added: Here is Fidelity's comment on the "State Fee" -

"The State Fee is the percentage of net assets paid to California's ScholarShare Investment Board for administrative costs."

Submitted by one_muggle on March 30, 2007 - 8:54am.

FYI: Many of the websites that I found still list California's plan as TIAA-CREF, which is out of date.

We (CA) now have Fidelity, for better or worse. I had invested in TIAA-CREF for both 529 and 403b, and Fidelity for IRA and brokerage. Since I've had good luck with both, I wasn't too upset, but I still prefer the customer service of TIAA-CREF (though Fidelity has much more information and services).

As far as the expenses:
The Fidelity aged-based mutual fund has an expense of 0.5%, and the "custom basket" of mutual funds is 0.3%+(whatever the mutual fund fees in your basket), there is also a Social Choice for 0.8%. This data is directly from my current ShcholarShare Prospectus. The TIAA-CREF that California had in the past was capped at 0.8%, but was typically lower, if I recall correctly.

There are a couple of good sites that I have used:
http://www.fool.com/college/college.htm free

By far the best I have seen is from Clark Howard (Consumer Advocate from Atlanta). It had been out of date, but I just checked and he has recently updated it.

BTW: I humbly suggest that if your wealth or income source is unusual you should (at least) look at the college savings options on the Fools page or similar (or an advisor). My sister has significant assets and was directed in another direction for college savings. And we have been directed to change as well once (and if) our business income significantly outpaces our regular salaries.
-one muggle

Submitted by avidsaver on March 30, 2007 - 10:37am.

Thanks for the links. I can assure you that I am NOT of "unusual" wealth or income, so I think that (at least for now), I can just do a direct plan.

The Clark Howard site suggests that I just invest in California although it classifies Utah (where I was leaning) as "elite." I think that I might still be leaning towards Utah, but I will give California a closer look. I was surprised to see New York in his "elite" category. Although they have low fees, I thought there were investment restrictions in NY that made it more difficult for the plan to realize the best returns (although no one has a crystal ball, right?).

One of the best pieces of advice in the article was to not save for college until I'm maxing out my retirement savings. It is my intent to contribute the full $15.5K to my 401K this year and $4k to my ROTH IRA. We will see.

Thanks again.

Submitted by Raybyrnes on April 12, 2007 - 7:41pm.

I like the NY plan. It is run by Vangard and does not charge the 20$ annual fee to leave it open. That helps lower overall cost. I also benefit becasue my parents are residents so I had them open up the account and make the contributions so they can claim the deduciton and I simply send them the check each month. This also keeps money out of my kids name for Fiancial aid reasons.

One other plan to consider is Virgina. It is a broker sold plan but uses the American Funds as its fund manger. This is an excellent fund family and may be worth the price of the ride. As you accumulate assets you may elect to use the American fundsw in which case your contributions to the 529 plan can be grouped in with other investment to reduce sales charges. The American funds will start with a 5.75 % load on most funds. My experience has been that by holding these funds they have earned thir money.

California Scholarshare is a good 529. Expenses are low and Fidelity is a good mangement company. You don't get the tax break. You don't have any control over that. I would consider using your parents to open up the account and replicating my strategy to maximise financial aid at the time they get ready for college.

Submitted by forsale_2007 on April 12, 2007 - 8:59pm.

When I looked at the CA plan versus an out of state plan, my understanding was that

1) if you participated in the CA 529 plan, qualified withdrawals from the 529 plan would both be Federal and State tax exempt.

2) If you participated in an out of state plan, qualified withdrawals would only be federal tax exempt (not state tax exempt).

Someone correct me if I'm wrong.

After looking at Vanguard's Nevada 529 and looking at Fidelity CA 529, I opted to participate in the Nevada plan because i didn't like Fidelity's fund selection. But to get around the state tax issue, I was just planning to open a CA 529 plan and transfer from the nevada plan when the time came.

I considered participating in other state plans, namely because i was interested in certain state laws. For example, some states consider 529 plans like a "retirement" plan and offer asset protection. Generally, those states exclude "retirement" plans from creditors. Unfortunately, it seemed like those state laws only applies to state residences. And CA doesn't have such laws that would protect your 529 plans from creditors. So it was a moot point.

CA suck. You can just about sue anyone for anything.

Submitted by Raybyrnes on April 13, 2007 - 9:51am.

False assumptions. No deduction in the state of California. Nevada has the Upromise accounts set up through Vangard but there is a 20$ yearly charge. New York has the identical plan minus the 20$ charge. As for assett protection have your parents set up the funds and send them the checks to put into the accounts for the kids. The upromise accounts typically carry a higher expense fee but if you are a small business owner and you take advantage of the upromise saving by using there credit cards and buying products sponsored by upromis e you can make up the cost difference. This requires a coupon cutter mentality.

Submitted by forsale_2007 on April 13, 2007 - 10:25am.

1. The $20/fee for vanguard accounts is waived for accounts >=$3000.

2. I know CA gives no pretax deductions. But, i was referring to earnings from the 529. My initial understanding was that earnings from 529 are federal exempt for qualified withdrawals for all 529 plans (irrespective of which where you live), but as a CA resident, your 529 earnings are only exempt if you're participating in the CA scholarshare plan. But I think the latest info I have is that that this isn't the case. Earnings from all 529 plans are CA state tax exempt.

Program manager Upromise Investments, Inc.
Fidelity Investments
Distribution manager Vanguard Marketing Corporation
Upromise Investment Advisors, LLC

Fidelity Brokerage Services, LLC
Program type Tuition Savings
Tuition Savings
Operational date December 10, 2002
October 4, 1999
Residency required No

State benefits
Maximum annual state tax deduction No state income tax.
Other benefits No state income tax.
No state tax deduction for contributions. Qualified withdrawals from this plan and other states' plans are exempt from California state income tax.
Creditor protection Yes. Creditor protection available. If the debtor lives in Nevada, State statute SB 434 provides that up to $500,000 of assets held in a 529 Plan account may be protected from creditors, depending on when such assets were contributed to the account and whether they are eventually used to pay qualifying higher educational expenses of the designated beneficiary.
Beneficiary age restrictions None
Transferrable to other family members Initial - anyone. Change - family of original beneficiary
Initial - anyone. Change - family of original beneficiary

Minimum opening amount $3,000
Minimum monthly electronic transfer $50
Minimum monthly payroll deduction $50
Maximum funding amount $310,000

Enrollment None
Maintenance $20 (for accounts under $3,000)
Fund expense Included in Asset Management Fees
Included in Asset Management Fees
Asset management 0.50%-0.70%

Investment options
Age-based portfolios 3
Individual portfolios 19
Stock 10
Balanced 2
Bonds 3
Short-term reserves 1
Guaranteed 0

Submitted by avidsaver on April 13, 2007 - 10:56am.

ForSale, I think you're right about the withdrawals being exempt from taxation no matter where, but I'll check. I don't exactly follow the numbers from your post. Are they comparing the two plans you have listed? Are both of those plans in Nevada?

Ray, all of my family is here, so I don't know that there's any advantage to having my mother open the account in her name (except that my son can have two accounts???). I guess I'm one of the rare breed of people who was born and raised in California.

I think I'm still leaning towards Utah, but I'll have to check on the creditor protection piece.

One of my big overall concerns is this -- what if I save too much in the account? Is the penalty worth it?

Submitted by Raybyrnes on April 13, 2007 - 1:39pm.

The benefit of having your parents save in a 529 account is that when you apply for financial aid the savings are not accounted for in the federal and often times school school calculation for financial aid. There are way too many people who think that they do not qualify for finacial aid when in fact they can. Additionally if they are strategic about the school process they can greatly improve there chances of maximizing there financial aid. IE get all money out of the kids accoutns 2 years before they start college. Financial aid will use roughly 35 % of chiold saving in calculation vs roughly 6 percent for parents. 2 pay off all credit card bill and prepayy the mortgage as the financial aid process begins. Why? They are not going to calculate real estate as an assett. By clearing out saving you give the illusion that you are in greater need. These are a couple of planning strategies that can be used to help mazimise financial aid.

Utah and Ohio have low expenses for funds but charge the 20$ annual fee. You may also want to look at the Virginia plan managed by the American funds. Excellent management.

Submitted by forsale_2007 on April 13, 2007 - 1:42pm.

Vanguard has a plan comparison tool. Those numbers compared the nevada plan (vanguard/upromise) with the scholarshare plan. It's available on vanguard's website.

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