529 plans have become a very popular tool for saving for college for those that choose to help out their kids (or simply funding some continuing education for yourself). Most states have their own 529 plans, sometimes even multiple choices within those plans. They are very flexible – anybody can invest in any state’s 529 plan, and that money can pay for college expenses in any other state. Beneficiaries are also easily changed between relatives.
The standard advice for picking a plan is to first check if your state has a good tax deduction for using your state’s plan. Something like 32 states offer some sort of benefit. If so, then consider going with that plan. If not, then go with the “best” out of state plan since many state plans have poor investment choices and higher fees. If somehow you have a really horrendous state plan with high fees, then you might even forgo the tax deduction and go with an out-of-state plan.
But… Why not do both?
Most 529 plans allow both partial and complete rollovers into another state’s 529 plan. So, why not first take any tax breaks available to you by contributing to the in-state 529, and then see if you are able to quickly roll over those funds into a better out-of-state plan. Keep the in-state plan open if you intend to make future contributions. I checked out a sampling of various state plans and they all offered partial rollovers.
This way, you get both the upfront tax benefit, and the long-term low-fee benefit. Seems plausible, no?
Some states might have a tax-deduction recapture rule. In that case, I might consider contributing only up to the tax deduction and then opening up another better 529 for additional contributions. You can have multiple 529s.
My Experience – Oregon, New Hampshire, and California 529s
You may be wondering why I have a 529 plan listed in my net worth, even though I don’t even have any kids. In fact, I have opened 529 plans from three different states! About five years ago, the California 529 was giving away $50-$100 gift cards for opening a plan and depositing $100. I figured, why not, that’s a pretty nice return on investment. We might use it, and if not you can always withdraw principal without penalty. So I opened up an account for me and one for my wife, with us as the beneficiaries.
Then, while in Oregon, they offered a state tax deduction on $2,000 of contributions each year (now $4,000 for a married couple). So I contributed to that. Finally, there was a Fidelity College Rewards 529 credit card that paid 2% back into a Fidelity 529 plan (it now only pays 1.5% back to new applicants). 2% back on everything was great, so I opened up a 529 from New Hampshire that Fidelity ran.
Long story short, I have since rolled everything into the New Hampshire 529 plan with no fees from anyone. The paperwork was easy, although you do want to track your contributions in case you make a non-qualified withdrawal. The New Hampshire plan is not bad, with a 0.50% expense ratio for their index fund portfolios including all management fees, and no maintenance fee, and only a $50 minimum to start.
Best Out-of-State Plans To Consider
I haven’t done exhaustive research on this topic, but if you believe in low-cost index funds then one of the best plans is definitely the Ohio CollegeAdvantage 529 plan. The have Vanguard mutual funds with a 0.18-0.23% management fee on top of fund expenses. The total annual asset-based fees can be as low as 0.21%, but the age-based portfolios are about 0.30%-0.35%. No maintenance fees.
If you believe there is a performance benefit to investing in several asset classes, there is also the more-expensive West Virginia SMART529 Select plan which offers mutual funds from Dimensional Fund Advisors (DFA). Total asset-based fees are 0.65% – 0.88%, plus a possible $25 maintenance fee for non-WV residents.
Since I still have my credit card relationship and my balances are low, I don’t bother moving away myself. I don’t actively contribute anything except my credit card rebates, so saving 0.15% in fees on my $3,000 would be less than $5 a year. But for folks with larger balances and held over longer periods of time, the performance advantage of lower fees can definitely be significant.