Author Topic: 529 Fees  (Read 556 times)

ericbonabike

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529 Fees
« on: May 10, 2018, 08:55:28 AM »
Hey All,

I have a 529 plan for each of my two kids.   I was poking around in the investment options yesterday and stumbled across something I thought a bit odd.

I have the option to invest in Vanguard VITSX Total Stock Market Index fund.  They say the expense ratio on the prospectus is 0.04%.  Which is super good.

But,  on the main page they say that the expense ratio is 0.29%.   

What the heck.   

https://www.collegecounts529.com/performance/vanguard-total-stock-market-index-529-portfolio/


so, I found in the teeny tiny print that:

"1 Performance information is current as of the referenced timeframe and is net of the 0.25% program management fee the Plan imposes."


In other words...the 529 management company tacks on another 0.25% to all funds. 

So my question is: 
1) Do the tax benefits of a 529 plan outweigh this increased cost??  I'm envisioning a break-even point that depends on a) how much the money sits in the plan.  and b) how much appreciation occurs over the investment.
2) Are these management fees typical of 529 plans??

I get to deduct the 529 contributions from my state income (but only if use THIS plan).  And we also avoid paying federal/state tax on the appreciation if those just are used for college expenses right?   


If I established a 529 plan with a non-approved state plan, I think I would lose the state tax write-off, but I might be able to get reduced management fees if I just establish a 529 plan with either fidelity or vanguard directly.   



Jrr85

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Re: 529 Fees
« Reply #1 on: May 10, 2018, 09:20:26 AM »
Hey All,

I have a 529 plan for each of my two kids.   I was poking around in the investment options yesterday and stumbled across something I thought a bit odd.

I have the option to invest in Vanguard VITSX Total Stock Market Index fund.  They say the expense ratio on the prospectus is 0.04%.  Which is super good.

But,  on the main page they say that the expense ratio is 0.29%.   

What the heck.   

https://www.collegecounts529.com/performance/vanguard-total-stock-market-index-529-portfolio/


so, I found in the teeny tiny print that:

"1 Performance information is current as of the referenced timeframe and is net of the 0.25% program management fee the Plan imposes."


In other words...the 529 management company tacks on another 0.25% to all funds. 

So my question is: 
1) Do the tax benefits of a 529 plan outweigh this increased cost??  I'm envisioning a break-even point that depends on a) how much the money sits in the plan.  and b) how much appreciation occurs over the investment.
2) Are these management fees typical of 529 plans??

I get to deduct the 529 contributions from my state income (but only if use THIS plan).  And we also avoid paying federal/state tax on the appreciation if those just are used for college expenses right?   


If I established a 529 plan with a non-approved state plan, I think I would lose the state tax write-off, but I might be able to get reduced management fees if I just establish a 529 plan with either fidelity or vanguard directly.

Have something similar with our state's 529.  Terrible fees, but we get a 5% state deduction.  For most reasonable projections, an extra .25% fee is not going to overwhelm the benefit of the initial deduction.  But obviously the more you fund earlier, the worse it gets.  If you say fund one year of college up front and then filter the rest in over 17 years, it would be pretty easy to have the extra costs exactly match the value of the state tax deduction (ignoring time value of money) and then you end up with something that looks like a Roth IRA, except limited to paying for 529 qualifying expenses. 

So I would say it's still probably worth it, but only if you are already maxing out all your retirement accounts, and I'd personally probably do a mega backdoor roth over a 529 with high fees.  But definitely as you get closer to needing the funds, it's worth running money through a 529 as you get the benefit of the state tax deduction and the money isn't there long enough to cost you a lot in fees (of course you also don't get to benefit from the tax free growth).  IDeally, I'd do a mega backdoor roth with whatever would have gone into the 529, and then as we got closer to college, if we can't cash flow college, I'd take distributions from the roth contributions to fund a 529, so I'd get the tax benefits and avoid the compounding of the high fees, but of course that assumes you are putting enough into mega backdoor roths that you don't need any growth to pay for college.

VaCPA

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Re: 529 Fees
« Reply #2 on: May 10, 2018, 01:03:38 PM »
.29% isn't that terrible. I'm guessing with the state tax deduction you'll come out ahead but you could probably put the numbers in a spreadsheet and do some projections to make yourself feel better.

To your question 2 it varies by state. There are websites which rank the 529 plans by state, from best to worst if you're curious.

harvestbook

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Re: 529 Fees
« Reply #3 on: May 11, 2018, 05:49:58 AM »
We had a similar plan in North Carolina. I funded up to the max to get the tax deduction. When NC eliminated that deduction, I opened a different one through Vanguard.

I assume you can have two 529s funded in the same year-- the state one up to the max for the deduction, and an outside one (for example, at Vanguard) where you put the rest. The state tax deduction may have to be repaid if not used for education, so plan to spend out of that one first, which you'd likely want to do anyway because of the higher fees.

YttriumNitrate

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Re: 529 Fees
« Reply #4 on: May 11, 2018, 07:51:27 AM »
Based on an older post, you have 11 and 13 year old kids. It looks like in Alabama $10k a year qualifies for the 529 tax right off, so that will save you $500 in the first year (assuming $10k contribution). The 0.25% fee works out to $25 a year on the $10k. Even if there is absolutely no growth for the next ten years (about when your 11 year old graduates college) you'll still be up $250.

ericbonabike

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Re: 529 Fees
« Reply #5 on: May 11, 2018, 08:35:58 AM »
Based on an older post, you have 11 and 13 year old kids. It looks like in Alabama $10k a year qualifies for the 529 tax right off, so that will save you $500 in the first year (assuming $10k contribution). The 0.25% fee works out to $25 a year on the $10k. Even if there is absolutely no growth for the next ten years (about when your 11 year old graduates college) you'll still be up $250.

Yeah that makes sense.  But if I have been putting that money in for 20 years, then it would translate to $500 of extra fees, negating the value of tax deduction.  So, then the only upside to the 529 plan would be the zero tax on appreciation if/when used for qualified education expenses. 

I like an earlier commentors approach:  Fund early retirement accounts instead of 529 plan while kids are young, and then the last 3 or 4 years of highschool, max out the 529 10000 limit, get the tax writeoff, minimize fees?




jacoavluha

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Re: 529 Fees
« Reply #6 on: May 12, 2018, 08:22:55 PM »
You’re minimizing the huge benefit of the Roth treatment. If you alternatively invested in a taxable brokerage account, the long term capital gains tax equates to 1,500 basis points in fees at liquidation. Plus taxes along the way on dividends. And you get the tax deduction up front on the 529.

That said, in my state the plan has a 29 basis point fee. I invest in the plan only to the extent I get  a state tax deduction. Beyond that we put money in the CA 529 plan where we pay only 12 basis points total including the fund ER.