Saving For Your Children Part IV: Choosing The Right 529 Plan Case Study
“The great aim of education is not knowledge but action."
― Herbert Spencer
“Education is when you read the fine print. Experience is what you get when you don't."
― Pete Seeger
Without action, knowledge is relatively useless. So let's talk about taking action when it gets saving for your kids in a 529. How do you choose the right plan? From there, it is up to you to automate the savings and you are on your way.
In wrapping up our “Saving for My Kids” series, I want to explore what makes a good 529 savings plan. If you decide to use a 529 savings plan, rather than a prepaid plan, there are a number of factors that go into choosing the appropriate one for your children. These attributes include: location, fees and investment options, and ease of contribution. Rather than speak in the abstract, let's go through the characteristics of the plan my wife and I chose and outline what it’s doing right. The New York 529 College Savings Program is my case study.
Plan Location
Several states provide a state income tax deduction if you contribute to the state’s plan. For example, a couple living in New York can receive up to a $10,000 income tax deduction if they contribute to the state plan. Here is a map of which states offer income tax deductions, and their hypothetical worth. You can confirm with your state’s plan administrator to see if you have this advantage and gather the full details.
Since California offers no 529 income tax deductions or incentives, CA residents should simply move forward with the best possible plan considering all other factors. To be clear, the location of your plan has no effect on where the plan dollars may be spent.
Investment Options
A good 529 savings plan will provide underlying investments that contain glide path (or target date) funds. The NY plan allows you to choose Conservative, Moderate, or Aggressive options. What does this mean? Basically this is an autopilot function for your invested funds. As the distribution date gets closer the funds are automatically invested less in equities which historically bring higher return, but may fluctuate greatly in an economic downturn, and bonds and cash alternatives, which are more stable but historically have less expected return. New York’s Aggressive model goes through five transitions. It begins with 100% of the portfolio invested in stock, then moves to 75%, 50%, 25%, and finally 0% allocated to that asset class. The remainder is allocated to bonds and cash equivalents.
So, what are you investing in exactly? In New York’s plan, each model is comprised of a combination of underlying mutual funds managed by Vanguard. These mutual funds are basically baskets containing hundreds of stocks and/or bonds which are designed to match the return of various sections of the stock and bond markets. Within the plan, you invest in a few baskets (the funds) and allow Vanguard to make sure that what lies within the basket daily matches what the basket is designed for.
There may be cases where the glide path fund doesn’t quite fit. Maybe your first child has decided to postpone college, but you would like to use the funds to pay for her little brother, or the eventual grandkids instead. In this case, the NY plan will allow you to choose a model with a particular asset allocation, and maintain that allocation as long as you want to do so.
Fees
Investing often carries a variety of fees. You may pay to buy and sell mutual funds (transaction fees), pay the fund manager to manage what happens within the mutual fund (management fees), and then pay the 529 plan administrator for all the administrative and legal duties that go into coordinating the plan on your behalf (administrative fees). Some 529 plans also charge an annual account maintenance fee. Other plans also have minimum contribution amounts which may limit you and your friends and family from giving.
In the case of NY’s 529 plan, all the fees are rolled into one simple annual cost of .16% . This means that for every $1,000 you have invested in the plan, you’ll pay $1.60 each year. Not too shabby.
When evaluating a 529 savings plan, check for each of these types of fees.
Ease Of Contributions
In Part III we already discussed gift tax contribution limits ($14,000 per individual, per beneficiary, per year), and noted that an individual can open multiple 529 accounts. So when I evaluate a 529 plan, I want to know not only how easy will it be for the owner to fund the plan, but also how easy will it be for them to automate contributions, and allow for family and friends to contribute non-reoccurring gifts.
The NY 529 plan maintains a few partnerships that create contribution ease.
Ugift- Ugift is a free service that allows individuals to donate to 529 plans through the Ugift529.com website. Once you have a participating 529 plan set-up, a Ugift account is automatically created on your behalf with a unique gifting code. This code can be distributed to family members and friends, allowing them to easily give online via electronic fund transfer or check. Ugift handles the transfer to the 529 with no cost to either the giver or recipient. Check out their website for more information and FAQs.
Upromise- The Upromise credit card is a cash rewards card that deposits your reward dollars into your 529 plan. You earn reward points in two different ways. The first is an overall 1% cash back that you receive on all purchases made with the card. The second allows you an additional percentage, often 5-10% cash back with purchases that originate on the Upromise website. Basically, if you wanted to buy a plane ticket with Orbitz, you start on the Upromise site, click to Orbitz, and then make your purchase. The system is undoubtedly a bit cumbersome.
Rather than utilize the Upromise tool, I highly suggest automating a monthly savings amount direct deposit from your bank. The most powerful savings tool is regularity. Start early, and save regularly, and you’re well on your way.
Note that Ugift and Upromise are offered by several other plans besides New York’s plan. If you choose an alternate plan, or are already invested in a different plan, you may want to check to see if these, or similar tools are available to you.
Now It’s Your Turn
All in all, New York’s plan excels in several aspects of 529 planning. If you would like to begin your own research on the various available state sponsored plan, a great starting point is http://www.savingforcollege.com . If you’re looking to be inundated with additional information, would like to compare plans, or run some calculations on savings, this is a good place to begin.
This concludes our four part series on saving for your kids. I hope it serves as a helpful resource for you as you navigate how (and how much) to save for your own children. I appreciate hearing from you. The content of your questions and feedback continues to shape the future of this blog.