We were poking around on medical moms blogs when we came across this comment from reader Ana. She said she wanted to just be told what to do with 529 plans because she’d hit the paradox of choice and everything was all complicated.
The post was almost a month old so we felt silly for replying to it there, so we figured we’d reply to it here and hope that Ana saw it.
Also: a disclaimer. We’re not financial advisers. Take our “advice” such as it is at your own risk.
Step 1: Check to see if you live in one of these states that offer tax breaks for 529 contributions.
1a. If you do, then go with your state’s 529 plan.
1b. If you don’t, then go with Utah. There are some other 529 plans that are now just as good as Utah’s but Utah’s has always been ranked among the top and we hope will continue to be ranked so.
Step 2: Pick a plan company within the plan.
2a. If Vanguard is one of your options, go with that.
2b. If not, then look at the fees. Pick one with low fees.
Step 3: Pick a fund from your choices.
3a. You want to look for terms “age-based”, “life-cycle” or “target-date”.
3b. If there are multiple choices among these options, then it doesn’t really matter which one you pick. They’ll be different in terms of risk and possibly fees. You’ll again want to focus on the lowest fee plan first. If your kids are little, more risk is better, if they’re closer to college, less risk is fine. Don’t worry about the risk if you can’t decide– flip a coin or something. It’s better to pick something randomly than to pick nothing at all because you’re worried about getting the “best”.
So, if you’re in a state that doesn’t give a tax advantage, you want the Utah UESP Vanguard Age-Based Aggressive Global fund. And you’re done. If you’re in another state we’d be happy to poke at their options for you.
Put in what you can. We like putting some away automatically each month. Something is better than nothing.
Are you saving for your kids’ college? How?
October 7, 2013 at 6:42 am
We do our state plan (Indiana) for both of our kids. We get a 20% tax credit on the first $5,000 we contribute each year which is a pretty sweet deal, I think.
October 7, 2013 at 9:38 am
I just sent for enrollment paperwork for Vermont’s state plan. Our state doesn’t offer a tax incentive, but we plan to move to Vermont in the next few years. I’ve been going back and forth on setting them up for the boys, but when I thought about the piddly interest they were getting with their college savings in a CapOne360 account I decided to go ahead and set up the 529s.
October 7, 2013 at 10:02 am
Of course I’m reading! THANK YOU!!! Seriously you just did what hours of searching and asking never could. You simplified the whole thing…my state has a certain amount tax deductible but apparently its for “any state plan” (though when I searched for anything about this on my state government site, nothing came up (maybe there isn’t any credit anymore?). Currently our college savings are sitting in an ING account, accruing minimal interest. We’ve put in lump sums when the boys get money from my parents. When we get back on our feet ourselves, we do plan to put in a little per month. (we’re trying to max out our own retirements first, better to have the kids take college loans than to have them obligated to help us out in our old age, right?)
October 7, 2013 at 10:12 am
Yes, it is better to max out your own retirements first.
Go ahead and take that money from the Ing savings account and stick it in the Utah plan. (Though double check on your state’s page to make sure there’s no longer a tax credit or that the credit is for any state plan– that information might be on the FAQ of their own 529 page.) Once you have the Utah plan, if relatives ask you what to get your kids for presents, you can always mention the 529 plan as an option and give them information to deposit money there directly.
October 7, 2013 at 11:55 am
OK, so I can’t find the information anywhere, so I submitted a question to the Revenue Bureau to confirm that any state’s plans are deductible. It was clear that only my state plan was exempt from inheritance taxes. So if only my state’s plan has tax benefits, I should go with that, right? Any thoughts on PA plans? (Yes I am shamelessly picking your braaaaiiiinnnnns) because this kind of thing just inevitably leads to paralysis. Anything more than one choice and its not going to happen for months/years).
October 7, 2013 at 12:04 pm
If only your state’s plan has tax benefits, then you should go with that one. (There’s no cases to my knowledge of states having such crappy plans that it makes a tax deduction a worse option.)
By PA you mean Pennsylvania? http://www.pa529.com/save-gsp-faq.html looks like they do offer state benefits for their plan. (Not sure if they offer them for other states.) They use Vanguard, which is great– they’re lowest cost. Go with their age-based aggressive. It is both the best choice in terms of long-term investing (it starts out mostly in stock indexes, then moves towards bonds in a way to maximize growth, which you can do when you have a long event horizon) and also has the lowest fees (0.48%), making it an easy choice.
Let me check the Utah expense ratio…
October 7, 2013 at 12:05 pm
Utah’s fees for the same Vanguard aggressive age-based fund are about half Pennsylvania’s, so ~0.22. But a state tax exemption will probably make PA’s more attractive than UT’s.
October 7, 2013 at 10:27 am
The institution where I work has a frighteningly generous tuition benefit for employees’ kids; if I can stay here another 11 years (OK by me) or keel over while employed, DS will qualify (assuming the benefit remains). To be honest I have somewhat mixed feeling — moral hazard and all that — but on the “bright” side its generosity notwithstanding, if he goes to a pricey cool it will also cost us a noticeable enough amount to be, well, noticeable.
My mom’s funded 529s for all her grandkids, which will be some help (we’re talking maybe 10K in there now, not huge sums — but, again, noticeable). Other than that, we’re prioritizing retirement savings over savings for college, and not to where funding both is easily feasible.
October 7, 2013 at 10:50 am
10K is a year at a state school these days, and it still has room to grow!
October 7, 2013 at 6:09 pm
Absolutely! We’re very grateful for it.
October 7, 2013 at 6:05 pm
we became overwhelmed with choices (and grandparent pressure) when we had a newborn, and just threw up our hands and chose our state 529. It’s OK. There were better possible choices but I’m not looking now.
Grandparent contributions are making up for any shortcomings in our decisionmaking. Child is 8 and he could pay for his first two years at State U if he Doogie Howsered it this year. If all goes well we’ll be able to kick some toward same-age cousins with no college funds (different grandparents) or maybe one of us old people could do another degree just for fun. Or maybe he’ll go somewhere insanely expensive. He’ll have more choices than we did, for sure.
One thing I learned from talking about college funding with the grandparents, though, is that our parents did pay-as-you-go for our tuitions. We both went to our respective State U’s, and it was 15-20 years ago when they were relatively cheaper, and I got a small scholarship, but I’m still astonished. My mom did it for 8 years in a row, since my little brother started my 5th year (i paid for that one). His parents had 2 in college at once. I guess that’s a vote for the “pay off the mortgage before your kids graduate high school” plan. Since we’re pre-saving and (knock on wood) paying off the mortgage when he’s a sophomore, we are going to be RICH compared to our folks during those years.
October 7, 2013 at 6:53 pm
Yeah, we did pay-as-you-go for my stepkids, and while we were only paying half (their mom picked up the other half) and this was about a decade and a half ago and we have very affordable state institutions (which is where they went), it was — well, noticeable, but, that said, feasible for us at that time, even with a 2-year overlap across the kids). And that was with a mortgage (back when interest was around 7.5%). But worth it, in a wide assortment of ways. This no doubt reflects much about out own environment and backgrounds (though not DH’s background; he put himself through school, first gen.), but it would have seemed very odd and unloving not to pay for the kids to attend at least a state school.
October 8, 2013 at 5:38 pm
my mom’s a public school teacher, and was single then. She used to make nickels squeak, but I still don’t know how she managed. Partner’s parents are both first-gen college graduates with factory worker parents and immigrant grandparents who didn’t/couldn’t help at all, so they value the hell out of education.
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March 8, 2019 at 1:55 am
[…] Now, I noted that today we regret not having put the $500/month/kid in our kids’ 529s (not to mention mortgage pre-payments) in our retirement options instead. The reason for that is that we are now high income and we are maxing out our retirement options (DH also has much less space to save than he did when he was working for the university). Any money we save over that amount cannot be hidden from colleges. There are a number of pricey schools out there that we will not get financial aid at should DC1 get in and decide zie wants to attend. (DC2 may be better off in terms of financial aid since DC1’s tuition and living expenses will do a good job of eating all of those assets.) We’ve paid off our house, have replaced DH’s car, will replace mine sometime in the next two years (Financial aid starts counting 2 years before college starts), and are renovating our kitchen, but even after all of that we will have assets leftover that could have been hidden in retirement accounts. We could in theory buy a bigger house or I could get something other than a sensible car, but I guess I’d rather donate tuition to a university than make those changes. (#richpeopleproblems) (Note that if our income goes up more, then we can ignore all of this because we won’t be eligible at any asset-level, but if DH loses his job and our income is halved, then all of this becomes extremely important.) Here’s our most recent recommendation of what order to save for multiple big financial goals, and here’s our recommendation of what vehicles to use. Finally, if you haven’t opened up a 529, here’s our thoughts on which one to pick. […]