A 529 College Savings Plan can be a great vehicle for college savings, due to its tax-deferred growth and the ability to withdraw funds tax-free for qualified education expenses (tuition, fees, room and board, etc.). In the past, we have recommended the North Carolina 529 for residents of NC. The plan had solid, low-cost investment options, and NC residents were eligible for a state income tax deduction of up to $2,500 of contributions ($5,000 for a married couple). This represented a nearly $400 annual tax savings for most of our married clients.
Unfortunately, as of January 1, 2014, the NC state tax deduction was eliminated. Without the tax deduction, the NC 529 Plan moved from being a good option for NC residents to a less attractive option when compared to plans offered in other states.
Given the change in the NC plan, we decided to take a zero-based budget review of the plans in all 50 states to determine the best plan going forward for our clients, no matter where they live. The most important criteria for us were: low cost funds, well-diversified investment options, both age-based and individual portfolio availability and an online portal for both clients and their advisor that would allow us to help service our clients’ plans.
Many plans met some of our criteria, but very few met it all. After much research and discussion, we’re happy to announce that the plan we are recommending going forward is the Utah Educational Savings Plan 529. This plan meets all of our criteria with flying colors and even provides a bonus attribute: the availability of funds from Dimensional Fund Advisors (DFA), whose funds we regularly use in our clients’ portfolios.
Important attributes of the Utah 529 plan
The Utah 529 plan has eight static investment allocation choices and four preset age-based investment options, which start out more aggressive for younger plan beneficiaries and become more conservative as college age approaches. In addition, investors (and their advisor) have the ability to create a customized age-based investment allocation.
A hallmark of the Utah 529 Plan is its simple, low-cost fee structure. Compared to the NC 529 Plan, the Utah 529 Plan offers lower program administration and investment fees for the Vanguard funds that are available in both plans. In fact, in a recent study comparing 56 different 529 plans, the Utah 529 Plan ranked among the lowest cost plans.1 These low fees allow more of the invested dollars to remain in the plan and grow. The availability of DFA and Vanguard funds allow us to pick excellent low-cost options when building portfolios.
Furthermore, the Utah 529 Plan has a robust and user-friendly web portal that offers account owners the ability to carry out a variety of features, including: managing contributions, accessing statements and tax documents, updating personal information and downloading investment data into Quicken personal finance software. Account holders also have the ability to grant Woodward Financial Advisors authorization to their accounts, which will allow us to access the account in real time to obtain account balances, perform trades and other transactions, track performance and fill client requests in a timely manner.
Recommended action steps, depending on your situation:
I live in NC and already have funds in the NC 529 plan. Now what?
We do not recommend moving the existing NC plan account to Utah, as that would trigger a repayment of the NC tax deductions you have gotten over the years. However, we do recommend opening a Utah 529 for all future 529 plan contributions. In other words, you’ll have two plans going forward with old dollars in the NC plan and new dollars added to the Utah plan. (Caveat: this may not be appropriate for clients with children (or grandchildren) who are close to college age, as the administrative hassle may outweigh the short-term cost and investment benefits of opening a second plan.)
I live in NC and don’t have a 529 plan but have been thinking about opening one. Now what?
We recommend that you open a Utah 529 plan for those future contributions.
I live in a state other than NC and have assets in a 529 plan somewhere. Now what?
It depends. If you have received a tax deduction from your home state, it’s possible that you’ll want to keep those assets in the plan. If you have used an out of state plan and have not received a tax deduction, we recommend that you open a Utah 529 plan and transfer the existing plan into that. We also recommend that future contributions go into the Utah 529 plan.
We welcome your questions on this important topic. One of the great things about the Utah 529 plan is that your wealth management team at Woodward Financial Advisors has the ability to help you open accounts, transfer accounts, contribute to accounts and track progress. It is our goal to continually add value to our relationship, and we see this plan as being another way we can help your overall financial plan.
If you have questions about your current 529 Plan, or if you just have a general question about saving for college, please reach out to us by visiting the Woodward Financial Advisors website or writing a question on our Contact Us page.
1 Savingforcollege.com’s 529 Fee Study, July 1, 2013.