529 Plans

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This topic contains 4 replies, has 3 voices, and was last updated by  BradH 4 years, 2 months ago.

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  • #16428

    BradH
    Participant

    TS Paul,
    Thank you for sharing your hard earned wisdom. I appreciate it.

    It occurs to me that the business cycle investing paradigm could be used for investments in 529 plans as well. I have two 6 year olds and I am investing in the USAA 529 plans for them. Their portfolios range from “Very Agreesive-98%stocks” to “Preservation of Capital-100% Cash”. https://www.usaa.com/inet/pages/investments_529_college_savings_plan_portfolio_options

    I would love to hear what you and others think about making adjustments to these investments similarly to our TSP allocation/contributions.

    Thanks for your thoughts,
    BradH

    #16440

    TS Paul
    Keymaster

    You definitely could use the business cycle to determine which of those USAA 529 plan portfolios to select at any given time.

    I suspect I would be in the “Very Aggressive” portfolio most of the time and would move through the “Conservative” to “Very Conservative” and finally to “In College” as indicators show the economy is nearing recession.

    I don’t have any experience with 529 plans. Those fees would be very high for an ETF or mutual fund (although that makes some sense as USAA certainly has additional admin burdens with the 529s). Are fees at this level pretty standard for a 529 across the industry?

    The TSP Allocation Guide www.TSPallocation.com

    #16452

    BradH
    Participant

    TS Paul,
    Thanks for your thoughts. Yes agreed, the fees are quite high. Additionally, the USAA plan is one of the highest. http://corporate.morningstar.com/us/documents/529Reports/529Landscape2013.pdf

    I found this Morningstar document. It is a little dated, but it appears the industry average is about 0.84 with the USAA fund around 1.16. I chose the USAA fund because that is my bank/brokerage firm (convenience) and because I have no idea where my kids will end up going to school. There can be state tax consequences associated with many of the plans if your child does not attend school in that state.

    The basic premise of the 529 is that all earnings will be federally tax exempt if used for qualified educational expenses. Assuming I plan to stay with the USAA fund and not switch, I think the tax break outweighs the management fee expenses in the long run. With that said, I do realize that one should consider whether or not an ETF or mutual fund in a brokerage fund may be able to achieve much higher returns and negate the tax advantage.

    One final intangible for me is that it just feels better to tell grandparents etc., that their birthday money is going in a 529 college fund instead of dad’s brokerage account.

    If you see any major flaws in my logic, please point them out.

    Thanks,

    BradH

    #16507

    Patrick Wozny

    Hi, I don’t think you are making a mistake with USAA, because convenience really counts, but the costs are high. I love the TSP because of its super low costs. Morningstar has USAA 529s in their third tier, not bad, but there probably are better choices based on both cost and performance. USAA’s plan is issued from Nevada. I use Maryland’s 529, run by T. Rowe Price and the price ranges from 0.19-0.81 for mostly actively managed funds. Morningstar thinks this is even a little high, compared to passively managed options, but reasonable for the value. Essentially the same plan is available for slightly less through AK — Both get Morningstar’s top rating, along with two other plans.

    My kids won’t likely go to school in Maryland, I am not a MD resident, but my state residence, AZ, even would give me a tax deduction now, for contributing to the Maryland plan. I don’t know of any state tax penalties (something in VA, if you use the tax deduction for the VA plan and then use the funds out of state, maybe?). I actually live overseas, so I don’t owe the state tax to AZ now anyway and I don’t claim the deduction.

    Another option that people have kind of forgotten about are Coverdell accounts. USAA offers them, I believe. These you can only contribute $2000 a year per child — but how it can be invested, and what counts qualified expense is a lot more flexible. If you can only contribute 2K a year, then they are pretty smart. You can roll them over to a 529, but not the other direction. You can spend it on a private grade school, high school computer or college prep course, and including the normal college expenses, for example. Ours are in addition to our 529s, because I can use them for foreign school costs. I have invested at a discount brokerage in portfolios of mostly Vanguard ETFs. I contribute and re-balance once a year, so my average costs including commissions are .17%. If I were following a business cycle strategy more closely, or investing every month, my cost would go up.

    A brand new option is FutureAdvisor that will open and manage with their robo-software, Coverdells and 529s in auto-adjusted portfolios of low cost ETFs for free for life. They are trying to attract assets and feel they can swallow the costs. You pay the underlying ETF expense around .15%, but this is a very good deal for the Coverdell, at least. I think the 529 at FutureAdviser was in the New Hampshire plan, but this seemed less compelling for my situation. I haven’t opened a Covedell there either yet, but it looks like they can do better than my once a year adjustments much cheaper, and investing every week or month there is much cheaper than my do it yourself version. I see no reason you couldn’t implement a business cycle strategy and let their software re-balance. I am still considering it

    I hope this gives you some ideas.

    #16521

    BradH
    Participant

    Patrick,
    I appreciate you taking the time to help educate me. I am completely ignorant of the Coverdell Accounts.

    I will definitely look into this and also do some more information gathering on the best 529 plans.

    Greatly Appreciated.

    BradH

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