By Jilian Mincer
It’s tempting to consider only taxes when using a 529 college savings plan. They’re important but shouldn’t be the only factor, especially when deciding what state plan to use.
All 529 investors get some tax relief because there are no federal taxes on the plans if the assets are later used on higher education. More than 30 states also offer additional tax and other benefits to residents who save in the plans. Five states –- Arizona, Kansas, Maine, Missouri and Pennsylvania –- extend those benefits to residents who invest in any 529 plan, in-state or out-of-state.
All those tax savings make 529 plans a good choice for many families. But it’s also important to consider the fees on the plans. (Fortunately for investors, those fees have dropped significantly in recent years.)
But as The Wall Street Journal reported, “the average fees tend to be higher than their mutual-fund counterparts, according to Morningstar, which recently started rating 529 plans.
So knowing what fees you’ll pay is especially important if you are saving for a child who is fairly young right now, says Andrea Feirstein, managing director of AKF Consulting Group in New York, which advises states and public authorities that administer 529 plans.
For example, last year, Ms. Feirstein ran the numbers on the New York 529 college saving plan when the fee on the direct sold plan was still .49%. She found that despite a generous state tax benefit, New Yorkers –- especially high earners -– could potentially get better returns in an out-of-state plan with lower costs. (New York couples who invest in the plan get up to a $10,000 deduction on their New York state taxes.)
Ms. Feirstein calculated that a family that makes a $10,000 contribution to a plan with a .28% fee could earn $650 to about $2,130 more over 18 years than if that money was invested in a plan with a .49% fee. (That assumes annual returns ranging from 4% to 12%.) Vanguard, the New York plan provider, has since lowered the fee to .25%. Among the online calculators that can help figure out how to maximize your state tax benefits–factoring in fees– is at the John Hancock website.
And as this SmartMoney.com story, “10 Things 529 Plan Providers Won’t Tell You,” points out, there’s plenty more to understand about 529s (including the fact that often, target-date investment options aren’t exactly on target).
Readers, have fees eaten into your 529 gains? How have you balanced the tax advantages and fee structure?