Personal Finance 529 Plans

BamaNation

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Also check out my HSA Plans thread. Again, I'm not a financial advisor in anyway so everything posted is based on my own research or experience. Caveat emptor!

If you have kids, nieces/nephews/grandchildren you should take a look at your state's 529 plan and see if you could get a tax benefit for saving for college. Otherwise, choose any state's plan that has the lowest costs and is well-managed and allows you to invest.

For example, we use the Georgia Path2College plan up to the max allowed per child but then have decided to put anything above that (if we have anything) in a Utah my529 plan which has nice age-based plans that are great for what we are targeting relative to asset allocation and like the "age glide path" that shifts across different funds over time.

Georgia has increased its tax-advantaged limits over the last couple years so if you're in GA or a handful of other states, you can get some good tax advantages. Also, Fidelity has a 2% cash back credit card that you can direct all your cash back to a 529. You could save hundreds or thousands in a 529 just by doing this (assuming you pay off your cc each month!) We route all cash back from anything we get from banks to this fund.

Lots of caveats and things to think about before you do a 529, but if you're sure your kid/niece/nephew/godchild/grandchild/kidfriend is going to college, it's great deal if you can get a tax benefit. You can also use some of the 529 savings for private k-12 schools.

So, do your due diligence but it could be a great way to save now for college in the future. Even at $25-$100 / month for 10-20 years you're probably able to pay for housing or food or books!

Clark Howard's (free) and Morningstar's ($$$) are the best guides, IMHO. Several other good guides are available. The plans and funds inside the plans can change year to year so make sure you review your plan each year or whenever changes occur. You can move money from one 529 to another without withdrawing it if you decide to go to a different provider.
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BamaNation

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If it's Alabama with any control over the account then no way. Are these private accounts?
Typically the good 529 programs are managed by TIAA, Vanguard, Fidelity, etc. for the states. While “the state” in the form of a 529 dept/group/cmte has oversight over selection of the fund managers and costs your funds are in an account similar to a 401k. Alabama’s is actually not bad for state residents. Some states charge high fees or don’t allow flexibility or good fund choices. The Clark Howard and Morningstar guides provide this type of info for all states.
 
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NationalTitles17

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Typically the good 529 programs are managed by TIAA, Vanguard, Fidelity, etc. for the states. While “the state” in the form of a 529 dept/group/cmte has oversight over selection of the fund managers and costs your funds are in an account similar to a 401k. Alabama’s is actually not bad for state residents. Some states charge high fees or sont allow flexibility or good fund choices. The Clark Howard and Morningstar guides provide this type of info for all states.
Thank you. So I guess my question is this:

Is there any chance Alabama can screw this up like they did the previous college tuition program? Lots of people lost on that one.
 

BamaNation

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One other thing pointed out by Clark Howard that is very true:

“While wanting to save for your kids’ education is great, remember my first rule: You shouldn’t save a penny for education unless you are already saving the maximum you can for your own retirement.”

As for your question, I’m assuming you are talking about the AL prepaid plan that assumed lower tuition inflation, got lower returns than expected, etc. i don’t know the details since I never had one and haven’t lived in the state in nearly 30 years.

It’s not a 100% accurate comparison but I look at 529 college savings plans vs 529 prepaid as the difference between 401k and pension retirement funds. Defined contribution vs defined benefit kind of thing. 529 savings plans can also be used just about anywhere in or out of the state where the account is located and can be used for some things besides tuition at the selected school. 529 prepaid is only usable in that state.

Check the BogleheadS and savingforcollege links in the first post for specifics about 529 rules, differences between the two options, and the legal niceties.
 
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NationalTitles17

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One other thing pointed out by Clark Howard that is very true:

“While wanting to save for your kids’ education is great, remember my first rule: You shouldn’t save a penny for education unless you are already saving the maximum you can for your own retirement.”

As for your question, I’m assuming you are taking about the AL prepaid plan that assumed lower tuition inflation, got lower returns than expected, etc. i don’t know the details since I never had one and haven’t lived in the state in nearly 30 years.

It’s not a 100% accurate comparison but I look at 529 college savings plans vs 529 prepaid as the difference between 401k and pension retirement funds. Defined contribution vs defined benefit kind of thing. 529 savings plans can also be used just about anywhere in or out of the state where the account is located and can be used for some things besides tuition at the selected school. 529 prepaid is only usable in that state.

Check the BogleheadS and savingforcollege links in the first post for specifics about 529 rules, differences between the two options, and the legal niceties.
Good answer. Thank you.
 

BamaNation

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Reminder - you don't owe your children higher education.
exactly. Our 13 yr old’s self professed goal is that we don’t have to pay a dime for her undergrad. If that’s the case we will either withdraw equivalent amounts each year and reinvest in our own savings or make it a generational fund for grandkids etc. or maybe create a UA scholarship. She’s wanted to be an emergency pediatrician since she was 2 (!!) so it could go toward med school if she actually follows that aspiration or any other educational path. But we max out every one of our retirement savings options before doing 529s and it also is a tax benefit in GA.
 
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4Q Basket Case

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Thank you. So I guess my question is this:

Is there any chance Alabama can screw this up like they did the previous college tuition program? Lots of people lost on that one.
One other thing pointed out by Clark Howard that is very true:

“While wanting to save for your kids’ education is great, remember my first rule: You shouldn’t save a penny for education unless you are already saving the maximum you can for your own retirement.”

As for your question, I’m assuming you are taking about the AL prepaid plan that assumed lower tuition inflation, got lower returns than expected, etc. i don’t know the details since I never had one and haven’t lived in the state in nearly 30 years.

It’s not a 100% accurate comparison but I look at 529 college savings plans vs 529 prepaid as the difference between 401k and pension retirement funds. Defined contribution vs defined benefit kind of thing. 529 savings plans can also be used just about anywhere in or out of the state where the account is located and can be used for some things besides tuition at the selected school. 529 prepaid is only usable in that state.

Check the BogleheadS and savingforcollege links in the first post for specifics about 529 rules, differences between the two options, and the legal niceties.
The Prepaid Alabama College Tuition (PACT) plan, and the 529 plan are entirely separate animals.

PACT was based on the assumption that, over the long term, equity returns will be equal to, or greater than, the increases in college tuition.

In short, it guaranteed 4 years of tuition in a state-sponsored college in exchange for a payment, or series of payments. That payment depended on the age of the beneficiary student, i.e., how long before they would be knocking on the door of college. Obviously, the younger the beneficiary, the lower the payment(s) were..

It actually worked fine for a while. Then, for a lot of reasons, in-state college tuition in Alabama was going up 12-15% a year, for multiple years in a row. The problem is that an equity portfolio will return 8-10% over the long term.

No equity fund can sustain 12-15% for any meaningful period of years. So the fundamental assumption no longer held, and the whole thing fell apart. I don't think anybody actually lost money, but I think some didn't get the full tuition payout they expected when they forked over their money.

Note: it was actually grandparents, not parents, that provided most of the money for PACT. They did it as a way to pass down wealth.

The come-apart really wasn't the fault of PACT, but the result of factors out of its control -- as in, 12-15% annual tuition hikes, largely because the state legislature couldn't / wouldn't/ didn't fund higher education the way it needs to be funded vs. 8-10% equity returns. The numbers just don't work.

That said, the Alabama Legislature and attendant special interests could tear up an anvil without trying real hard. So to ask whether they could screw up a 529 plan is to ask a question with an obvious answer.....yes, they could.

There are dozens of ways to do that. But if they did, it would probably be through choices of investment options that paid the legislators to be on the list, and offset the "grease" with fees out of line with market. But like I said, the specifics of the quid pro quo are almost infinite.

The difference with Alabama's 529 plan vs. PACT is that the free market blessedly limits legislators as to how far they can go with that mis-management.

Most states allow non-residents to invest in their 529 plans. So the Alabama legislators are limited in the scope of their mis-management by the investors having lots of other options -- something PACT investors didn't have.

True, some states charge fees for non-residents. But that means others don't.....or if they do, it's not a big deal. Whatever the specifics, the fact remains: If you don't like Alabama's plan, or its investment options, or the fees, or simply don't trust the Alabama Legislature, there are lots of alternatives that weren't available to PACT investors.

What I don't know is whether you can take existing Alabama 529 investments, and roll them over into another state's plan. You'd need to talk with someone with more specialized knowledge than me.

My point is: Don't let the PACT fiasco prevent you from taking advantage of Alabama's (or some other state's) 529 plan.

It's a great way to fund college, and done early in the child's life, is relatively painless.

Keep in mind: You're dealing with exponential curves here, and what constitutes "early" is fleeting.

At birth is best. Before 5 will work. If the child is 10 (8 years to college), you will definitely feel it. If the child is 13 or older (as in, 5 years or fewer to college), it will be painful.

Early bird really does get this worm.
 
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BamaNation

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To give some examples on fees...

Utah my529 plan:
“It is assessed monthly on the balance of the account on the last business day of the month. The fee ranges from 0.10% to 0.18% percent ($1 to $1.80 per $1,000 invested), depending on which age-based, static, or customized investment option you select for your account.”

Alabama
CollegeCounts 529: Direct-Sold: 0.02% to 0.63%
CollegeCounts Advisor-guided 529: 0.66% - 1.52%


Georgia
Path2College 529: depending on Chosen portfolio: 0.05% to 0.31%

you can see that fees are ridiculous on the AL advisor-guided plans. So avoid advisors!

try to find plans that use Vanguard index funds or equivalent because the fees will be low and Vanguard index funds are almost always well-managed. Nevada’s plan is the only one actually managed by Vanguard.
 
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4Q Basket Case

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To give some examples on fees...

Utah my529 plan:
“It is assessed monthly on the balance of the account on the last business day of the month. The fee ranges from 0.10% to 0.18% percent ($1 to $1.80 per $1,000 invested), depending on which age-based, static, or customized investment option you select for your account.”

Alabama
CollegeCounts 529: Direct-Sold: 0.02% to 0.63%
CollegeCounts Advisor-guided 529: 0.66% - 1.52%


Georgia

Path2College 529: depending on Chosen portfolio: 0.05% to 0.31%

you can see that fees are ridiculous on the AL advisor-guided plans. So avoid advisors!

try to find plans that use Vanguard index funds or equivalent because the fees will be low and Vanguard index funds are almost always well-managed. Nevada’s plan is the only one actually managed by Vanguard.
[All the bad words] ridiculous.

I had no idea Alabama's fees were that out of line. Guess it's because Mrs. Basket Case and I never had kids, so the numbers were of no personal interest.

I won't bore you with the math, but that level of difference in fees will take a huge toll over time.

Still, don't forego the 529.....just avoid Alabama's.
 
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BamaNation

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I would say avoid the advisor-guided Alabama ( or any other state ) plans. However, many of Alabama’s direct-sold (self managed) plans are very competitive for residents.

I would consider <0.10% desirable and <0.30% ok. Anything above that I would avoid.

also, 529s can be transferred. “529 plan account transfers include the rollover of one 529 plan to another; the transfer of other college savings vehicles, such as Coverdell Education Accounts, series I/EE savings bonds, and Unified Gift to Minors custodial accounts to a 529 savings plan; as well as the transferring of beneficiaries and the ownership interest in the plan.”




 
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2003TIDE

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While wanting to save for your kids’ education is great, remember my first rule: You shouldn’t save a penny for education unless you are already saving the maximum you can for your own retirement.”
This. Your kids can always work their way through college or take out a loan. You can't take out a loan for retirement and working in retirement isn't ideal for most ppl.


I have path2college here in GA. It is pretty good. I still need to sit down and eval the fees. They changed up the investments last month and I haven't looked at the new plan my old one converted to.

FWIW - I still think FL has the best deal if you want a prepaid plan. I just couldn't stomach commiting my 2yr old to a FL school. :ROFLMAO:

You starting an HSA thread next? ;) Those are cool. Esp when they let you invest in Vanguard funds.
 
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BamaNation

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You starting an HSA thread next? ;) Those are cool. Esp when they let you invest in Vanguard funds.
Hey, great idea! Yes, I'll do that. We call them "Stealth IRAs" :)

Meanwhile, GA's P2C 529 is a great deal for in-state b/c you can contribute $8,000 for each child each year and get the state tax benefit for doing so. We just have it automatically deposit each week for the whole year.

Here are some stated Ga P2C benefits of 529s (but it applies to all 529s, not just Ga's P2C) ...
  • USE FOR MORE THAN TUITION: "... can be used to pay for tuition, certain room and board costs, computers and related technology expenses as well as fees, books, supplies, and other equipment at a post-secondary school (i.e. college or university). In addition, the Path2College 529 Plan can also be used for K-12 school tuition, up to $10,000 annually per student from all 529 Plans."
  • TAX FREE EARNINGS: "Your earnings, if any, are free from federal income tax when used for qualified expenses."
  • USE ANYWHERE: "Funds can be used at any accredited university, college or vocational school nationwide — and many abroad."
  • FINANCIAL AID IMPACT: "Lower Impact on Financial Aid than Other Savings Options: Many parents worry that a 529 Savings Account can adversely affect eligibility for financial aid. So long as the parent is the account owner, funds are typically treated as belonging to the parent, not the child, minimizing the impact on financial aid. ... (You should check with the schools you are considering regarding this issue.)"
  • POSSIBLY A STATE TAX REDUCTION: this benefit is similar to what many states have but the amount of allowed deduction varies ... check your state's tax law: "In addition to federal tax benefits, there are state tax benefits as well. For the Path2College 529 Plan, tax treatment is as follows: ... Effective for taxable years beginning on or after January 1, 2020 (tax returns to be filed in 2021), contributions are deductible up to $8,000 per year per Beneficiary for joint filers, and $4,000 per year per Beneficiary for all others. Incoming rollovers from other 529 plans do not qualify as contributions eligible for the state income tax deduction."

    In Alabama, it is up to $10,000 deduction for married couples. Check the rules at CollegeCounts. Other states range from $0 deduction to a lot more. As an example, the map below shows estimated savings for a married filing jointly couple having $100k in taxable income who contribute $100/mo to each of 2 children's 529 plans (See more details here). Alabama's is among the most generous deductions.

1594299853246.png

Seven states currently have a state income tax, but do not offer a deduction for contributions: California, Delaware, Hawaii, Kentucky, Maine, New Jersey, and North Carolina.

Compare plans across states.
 
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2003TIDE

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Hey, great idea! Yes, I'll do that. We call them "Stealth IRAs" :)

Meanwhile, GA's P2C is a great deal for in-state b/c you can contribute $8,000 for each child each year and get the state tax benefit for doing so.
Did that change this year? I thought it was $4k for married filing jointly.
 

BamaNation

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A few years, after much research, we put together an overview of some of the plans we were considering for our 529s.

Below is from the spreadsheet we compiled comparing the glide path (equity/bond/cash/etc) and expense ratios as they all changed as the kid gets older. We also added things like what funds are they invested in, Morningstar's 529 plan rating, who the asset and program managers are, ability to customize portfolios, etc,

1594301255103.png
 

BamaNation

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Did that change this year? I thought it was $4k for married filing jointly.
Yes. From the plan: " Due to IRS deadline changes, contributions made by July 15, 2020 are deductible for 2019 Georgia income tax purposes up to $4,000 per year per Beneficiary for those filing a joint return and up to $2,000 per year per Beneficiary for all others. Effective for taxable years beginning on or after January 1, 2020 (tax returns to be filed in 2021), contributions are deductible up to $8,000 per year per Beneficiary for joint filers, and $4,000 per year per Beneficiary for all others. Incoming rollovers from other 529 plans do not qualify as contributions eligible for the state income tax deduction." (emphasis added)
 

2003TIDE

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Yes. From the plan: " Due to IRS deadline changes, contributions made by July 15, 2020 are deductible for 2019 Georgia income tax purposes up to $4,000 per year per Beneficiary for those filing a joint return and up to $2,000 per year per Beneficiary for all others. Effective for taxable years beginning on or after January 1, 2020 (tax returns to be filed in 2021), contributions are deductible up to $8,000 per year per Beneficiary for joint filers, and $4,000 per year per Beneficiary for all others. Incoming rollovers from other 529 plans do not qualify as contributions eligible for the state income tax deduction." (emphasis added)
Keewl. Looks like I'm dumping some more money in the 529 this year.
 

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