529 college savings plan

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Hi All

For a family which has high chances to move from one state to another within US due to job,what could be best option for 529 collge savings account for my kids.
Also which option is generally considered better pre paid tution program or savings plan?

Appreciate your help!
Andy

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Sounds like MD has the key elements of a great plan, but what is not clear is the value.

A great prepaid plan must

Be guar... (more)

psychtobe (Jan. 23, 2013 @ 11:26p) |

A great prepaid plan must also have a good exit if the plan isn't going to be used. In other words, if the underlying ... (more)

BrodyInsurance (Jan. 24, 2013 @ 6:43a) |

Very thorough analysis. It has been a few years since I did this research, and I don't have my notes at hand, so I am g... (more)

dcwilbur (Jan. 24, 2013 @ 8:32a) |

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Prepaid tuition plan? Might not be too good of an idea with likely moves from state to state. It'll be too hard to say what the ultimate in-state is during kids' college. Savings plan is useable at whichever college, even if the family moves.

The question is, is the family's current state one where the state plan has state income tax deduction benefits? If so, that is often the best choice, for as long as the family is living in that particular state. If not, the cheapest plan should be best. Currently, that'd be NY's.

Thanks for the replY!!

Moving isn't a problem.

If the state you live in has a decent plan and a state tax advantage then contribute to that plan. You can just keep the old plan as is or move it to your new plan.

It may be an issue for a pre paid plan.

Sorry I meant for 529

I wouldn't consider the other at all.

dhodson said:   Sorry I meant for 529

I wouldn't consider the other at all.


a prepaid plan is typically a 529.

BrodyInsurance said:   dhodson said:   Sorry I meant for 529

I wouldn't consider the other at all.


a prepaid plan is typically a 529.


A prepaid plan is usually one where you lock in tuition at the current rate, then makes deposits to account for the full amount.

lotusgardener said:   BrodyInsurance said:   dhodson said:   Sorry I meant for 529

I wouldn't consider the other at all.


a prepaid plan is typically a 529.


A prepaid plan is usually one where you lock in tuition at the current rate, then makes deposits to account for the full amount.


Yes. The point was that 529 plans come in two flavors, savings plans and pre-paid tuition plans.

I don't think that there are any 529 pre-paid plans in which once can actually do this at current rates. They all charge a premium. Maybe somebody knows an exception.

Be VERY careful with the prepaid route. Illinois, where I am, had to suspend the program for new participants as it came out program is 30% underfunded. The scariest thing is it is NOT guaranteed by the state. People who paid in moght not get their full benefits. It truly is a Ponzi scheme as they admit if they don't sell at least 1000 new contracts a year, at a new inflated price by the way, the program will eventually go bust. Bad situation here in Illinois.

FreeCheese said:   Be VERY careful with the prepaid route. Illinois, where I am, had to suspend the program for new participants as it came out program is 30% underfunded. The scariest thing is it is NOT guaranteed by the state. People who paid in moght not get their full benefits. It truly is a Ponzi scheme as they admit if they don't sell at least 1000 new contracts a year, at a new inflated price by the way, the program will eventually go bust. Bad situation here in Illinois.
That's scary/sad/typical. We did prepaid in FL for all of my kids and with one just a couple of years away from enrolling, are very happy with the expected redemption value since tuition has gone up 40%+ since we started; while the stock market tanked and our neighbors lost a load with their 529 investment option.

TheGMan said:   FreeCheese said:   Be VERY careful with the prepaid route. Illinois, where I am, had to suspend the program for new participants as it came out program is 30% underfunded. The scariest thing is it is NOT guaranteed by the state. People who paid in moght not get their full benefits. It truly is a Ponzi scheme as they admit if they don't sell at least 1000 new contracts a year, at a new inflated price by the way, the program will eventually go bust. Bad situation here in Illinois.
That's scary/sad/typical. We did prepaid in FL for all of my kids and with one just a couple of years away from enrolling, are very happy with the expected redemption value since tuition has gone up 40%+ since we started; while the stock market tanked and our neighbors lost a load with their 529 investment option.


To me, the biggest concern with pre-paid plans is understanding the exit strategy. If a child doesn't go to a state school as planned (and there is a great possibility of this happening), how much does the plan pay out? With many plans, it works out to a very small return. So, look at both the guarantees and what happens when your college plans change.

BrodyInsurance said:   To me, the biggest concern with pre-paid plans is understanding the exit strategy. If a child doesn't go to a state school as planned (and there is a great possibility of this happening), how much does the plan pay out? With many plans, it works out to a very small return. So, look at both the guarantees and what happens when your college plans change.For sure. For us, the small return was acceptable in light of the negative return possibility. Also, once the time comes, some states have reciprocal agreements and some private schools have allowances as well. A very hard choice for someone without home stability though.

TheGMan said:   BrodyInsurance said:   To me, the biggest concern with pre-paid plans is understanding the exit strategy. If a child doesn't go to a state school as planned (and there is a great possibility of this happening), how much does the plan pay out? With many plans, it works out to a very small return. So, look at both the guarantees and what happens when your college plans change.For sure. For us, the small return was acceptable in light of the negative return possibility. Also, once the time comes, some states have reciprocal agreements and some private schools have allowances as well. A very hard choice for someone without home stability though.
Are there states where the payout amount (for pre-paid 529 plans) depends on the college you attend --- assuming you do attend? In the few that I am aware of, the payout amount is determined by the tuition rates within that state but independent of where the student actually attends (private, out-of state etc.). Thus the fact that OP is changing residence to a different state might have little bearing, other than eligibility to open an account and possible tax deduction.

Also I would like to know if there is an annual limit of regular 529(not prepaid)? May be it depends on each state?

uutxs said:   TheGMan said:   BrodyInsurance said:   To me, the biggest concern with pre-paid plans is understanding the exit strategy. If a child doesn't go to a state school as planned (and there is a great possibility of this happening), how much does the plan pay out? With many plans, it works out to a very small return. So, look at both the guarantees and what happens when your college plans change.For sure. For us, the small return was acceptable in light of the negative return possibility. Also, once the time comes, some states have reciprocal agreements and some private schools have allowances as well. A very hard choice for someone without home stability though.
Are there states where the payout amount (for pre-paid 529 plans) depends on the college you attend --- assuming you do attend? In the few that I am aware of, the payout amount is determined by the tuition rates within that state but independent of where the student actually attends (private, out-of state etc.). Thus the fact that OP is changing residence to a different state might have little bearing, other than eligibility to open an account and possible tax deduction.


It depends upon the specific plan. That is why one must understand the rules with their specific pre-paid plan before choosing to go the pre-paid plan. It would stink for college costs to increase 8%, the underlying investments to return 8% and only get a 2% gain on the account because the person chose to go to school elsewhere.

samandy said:   Also I would like to know if there is an annual limit of regular 529(not prepaid)? May be it depends on each state?

There is no annual limit. Instead, there is an account limit. Once an account hits this amount, no additional contributions are allowed. This is different with each plan, but is typically in the $300,000 range.

samandy said:   Also I would like to know if there is an annual limit of regular 529(not prepaid)? May be it depends on each state?Here you go

529 plans are getting cheaper across the board. Avoid advisor-sold products. Utah, nevada, and Illinois have low cost direct sold programs. Prepaid tuition is less and less a deal in most places. It seems that Massachussetts has a pretty good plan at this point, with the worst case scenario being a rate of inflation return if the student goes to school out of state, and no up front premium to buy units. Like an I bond, but tax free for education regardless of income, with very high annual purchase limits, and an upside scenario of actual tuition inflation if used at a qualifying school.

psychtobe said:   529 plans are getting cheaper across the board. Avoid advisor-sold products. Utah, nevada, and Illinois have low cost direct sold programs. Prepaid tuition is less and less a deal in most places. It seems that Massachussetts has a pretty good plan at this point, with the worst case scenario being a rate of inflation return if the student goes to school out of state, and no up front premium to buy units. Like an I bond, but tax free for education regardless of income, with very high annual purchase limits, and an upside scenario of actual tuition inflation if used at a qualifying school.

Let's just keep in mind that pre-paid plans are 529 plans. 529 savings plans are getting less expensive, but the pre-paid plans seem to be getting more expensive. The savings plans are getting less expensive for two reasons:

1)States are moving to lower cost providers.
2)States are not requiring as much of a kick back.

The Utah savings plan has excellent fees

psychtobe said:   529 plans are getting cheaper across the board. Avoid advisor-sold products. Utah, nevada, and Illinois have low cost direct sold programs. Prepaid tuition is less and less a deal in most places. It seems that Massachussetts has a pretty good plan at this point, with the worst case scenario being a rate of inflation return if the student goes to school out of state, and no up front premium to buy units. Like an I bond, but tax free for education regardless of income, with very high annual purchase limits, and an upside scenario of actual tuition inflation if used at a qualifying school.

Dear FWF,
I just started researching 529.
I found good info on this 2-page archived thread: http://www.fatwallet.com/forums/finance/1137563/m16389224/#m16389224

I haven't heard of Clark Howard before, but if you folks have, would you agree with his comparison of the cost-effectiveness of different state plans? He suggests UT, IA, GA, NY, MI have the best plans. http://www.clarkhoward.com/news/clark-howard/education/clarks-529-guide/nFZS/
I am in Iowa, and now wondering if it makes more sense to start a 529 in my own name, so that it doesn't affect the FAFSA eligibility of my child.
If there's a better out-of-Iowa state plan, wonder if it'll make sense to have the spouse start another 529 elsewhere, to sort-of diversify (robs us of some of the IA state tax benefits, though)?

Another look at returns: http://www.savingforcollege.com/articles/2012-plan-performance-rankings-q3

http://collegesavings.about.com/od/statetaxdeductions/a/iowa-529...

You only get state income deduction in IA for contributing to IA's plan. With 0.28% costs, it's not too high at all, so IA probably makes sense for you.

Don't look at returns. Just minimize costs. One year, some T Rowe active fund could be a star performer. The next year, it could be a total dud. On average, for a given asset class, the lowest cost fund wins when you invest in it for a long enough period of time.

I am in Iowa, and now wondering if it makes more sense to start a 529 in my own name, so that it doesn't affect the FAFSA eligibility of my child.

It doesn't work that way. Whether you own the plan or your child owns the plan, it is treated identically. It also doesn't matter whether you or the child is the beneficiary.

I thought there was some FWF discussion about how a large amount of $$ in 529 would, during the college application process, negatively affect the child's chances of winning scholarships? Thanks.

FW10001 said:   I thought there was some FWF discussion about how a large amount of $$ in 529 would, during the college application process, negatively affect the child's chances of winning scholarships? Thanks.

Money sitting in a 529 plan should have no different consequences than money sitting in a checking account.

FW10001 said:   psychtobe said:   529 plans are getting cheaper across the board. Avoid advisor-sold products. Utah, nevada, and Illinois have low cost direct sold programs. Prepaid tuition is less and less a deal in most places. It seems that Massachussetts has a pretty good plan at this point, with the worst case scenario being a rate of inflation return if the student goes to school out of state, and no up front premium to buy units. Like an I bond, but tax free for education regardless of income, with very high annual purchase limits, and an upside scenario of actual tuition inflation if used at a qualifying school.

Dear FWF,
I just started researching 529.
I found good info on this 2-page archived thread: http://www.fatwallet.com/forums/finance/1137563/m16389224/#m16389224

I haven't heard of Clark Howard before, but if you folks have, would you agree with his comparison of the cost-effectiveness of different state plans? He suggests UT, IA, GA, NY, MI have the best plans. http://www.clarkhoward.com/news/clark-howard/education/clarks-529-guide/nFZS/
I am in Iowa, and now wondering if it makes more sense to start a 529 in my own name, so that it doesn't affect the FAFSA eligibility of my child.
If there's a better out-of-Iowa state plan, wonder if it'll make sense to have the spouse start another 529 elsewhere, to sort-of diversify (robs us of some of the IA state tax benefits, though)?

Another look at returns: http://www.savingforcollege.com/articles/2012-plan-performance-rankings-q3


FW senior member who has never heard of Clark Howard??!??

Hmmm...Probably I am too ignorant. Seems like NY is cheapest. And when I google for it, 100s of site show up.
How do I know which one is state's official plan or there is some other way?

Savingforcollege.com

UT is cheap and good.

The NYSaves Vanguard plan is the cheapest now, at least last I checked with their latest cost cuts.


I setup a 529 in fidelity for my oldest child. When he is done, I will use for next. My Roth can also be used for educational purposes without penalty, but I am forgoing the state taxes. I want to have the flexibility if kid does not use, or chooses to use in other state. Fidelity is convenient since they have full shop of investments. Did not want the hassle of another brokerage.

John Horton, distributions of earnings from your Roth IRA, used for your (or your dependents) qualified higher-education expenses are penalty-free but not tax-free, unless you are over the age of 59.5 and you have had a Roth IRA for at least 5 years. In that case, all your distributions, regardless of purpose (eg H&B) are tax-free and penalty-free.

That is quite different from a 529, in which distributions of earnings used for your (or your dependents) qualified higher-education expenses are both penalty-free and tax-free.

Thirdly, a 529 plan can be used for higher-education in any state - and in fact in many institutions abroad.

Finally, your time must be worth alot, for you to avoid the hassle of "another brokerage". The fees Fidelity charges are steep. Unlike say a nicer house or a nicer car, more money spent on investment management fees just goes down the drain.

nicely said sesat

xerty said:   The NYSaves Vanguard plan is the cheapest now, at least last I checked with their latest cost cuts.

Most plans have multiple investment options. If all invested in the same investments, then yes, you would choose the plan with the lowest cost. However, lowest cost can be a serious mistake if you are investing in a poorly performing fund or plan.

There is no reason to use an intermediary like fidelity....you can invest directly and manage the account directly. You also can invest in any state's plan, irrespective of where you live. You may gain in flexibility at the cost of losing some tax advantage, but that tax advantage may be minimal depending on the state. As others have said, you could have one 529 in your state where you deposit the maximum your state allows you to deduct in taxes...and then any additional money gets deposited to some other states 529 plan because it has more options and perhaps lower costs.

Hmm... I purchased from nysaves.org , but it did not give me any options to choose which mutual funds. Only option were age based or aggressive or moderate...
Neither I got a single email confirmation that account has been opened or in process..
Is nysaves.org is official website of NY state? Also I noticed URL changes to soemthing else (https://uii.nysaves.s.upromise.com/content/home.html) while opening account?
Please share your experiences.

Thanks
Andy

samandy said:   Hmm... I purchased from nysaves.org , but it did not give me any options to choose which mutual funds. Only option were age based or aggressive or moderate...
Neither I got a single email confirmation that account has been opened or in process..
Is nysaves.org is official website of NY state? Also I noticed URL changes to soemthing else (https://uii.nysaves.s.upromise.com/content/home.html) while opening account?
Please share your experiences.

Thanks
Andy


Look at individual portfolios https://uii.nysaves.s.upromise.com/content/individualoptions.htm...

they all have matching Vanguard funds.

Would a Coverdell Educational IRA be a better fit instead of a 529 for the OP?

elist said:   Would a Coverdell Educational IRA be a better fit instead of a 529 for the OP?
I am answering your question, without considering the OP's choice of prepaid-tuition vs savings-plan. 529's and ESA's are similar, but different. The critical distinctions are:

Contribution limits: ESA has an annual limit of $2,000 per beneficiary. 529's have very large contribution limits (that differ by state) with no meaningful limit on annual contributions. For example, NY Saves has a limit of $375,000 per beneficiary.

Investment options: 529's offer a menu of mutual funds, but an ESA can invest in anything other than life insurance/collectibles/liquor (the usual IRA prohibited investments) If a contributor has access to investments with significant opportunities for growth, then the ESA is the best way to go. For most of us who are going to invest in the stock market, the most efficient way to do so is with low-cost index mutual-funds. Vanguard will not sponsor ESA's.

Ownership: A transfer to an ESA is, for both property-law and transfer-tax purposes, a transfer to the beneficiary. A transfer to a 529 is quirkily treated, for transfer-tax purposes, as a transfer to the beneficiary; but the original owner may still own the 529 assets. If a 529 contributor names someone else as owner, it is treated for property-tax purposes as a transfer to the new owner; but for transfer-tax purposes is still treated as a transfer to the beneficiary. In many states, outside of bankruptcy, there is little creditor protection available to ESA beneficiaries.

Age/income limits: ESA's can only be funded for beneficiaries under the age of 18. ESA contribution limits also phaseout for depositors whose income is 95-110k single, 190-220k joint. 529's have no age/income limits.

For all their differences, 529's and ESA's are very similar. The choice between the two will have no impact on "a family which has high chances to move from one state to another within US due to job". However, the "transfer gazillion dollars in future-interests using annual exclusions for gifts-of-a present-interest" technique that gets Brody and me so excited will not work with ESA's.

Skipping 5 Messages...
ProfessorEd said:   I would be curious if anyone else who has examined the Md. plan agrees with my favorable appraisal.Very thorough analysis. It has been a few years since I did this research, and I don't have my notes at hand, so I am going from memory. First, the best choice for a Maryland resident is almost always going to be a Maryland 529 plan. Taxes are so high here that it would be hard to make up that instant return by foregoing the state tax benefit and going with an out-of-state plan.

You’ve also hit on another obscure provision about the state tax benefits. In many states, you can deduct the 529 contributions, say $2,500 per child, but there is a max of $5,000 overall. In Maryland, BOTH parents can set up plans and take the deduction (even if one parent has no income), AND there is no overall cap. For someone who has say, four children, Mom & Dad can both set up plans for each child, contribute $2,500 to each for each child, and the entire $20,000 gets the state tax break. That’s an instant return of about $1,800 that would be capped at a lower amount in most other states.

With respect to the prepaid tuition plan vs. the traditional 529…In the early days of prepaid plans, there were some great bargains. Anyone who bought them – in most states – in the 1980’s got a GREAT value. After that, the state educational systems started going broke and tried to make it up by raising tuition – AND raising the prices on the prepaid plans. When I did the calculation on the Maryland plan a few years ago, I estimated an internal rate of return on the prepaid plan to be just a couple of percent as I recall. I used reasonable assumptions for the expected rise in tuition costs and other fees, and I just thought it did not represent a good return on investment versus expected returns in the traditional 529. I went the traditional route.



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