Author Topic: College Savings Plans  (Read 3400 times)

umterp1999

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College Savings Plans
« on: December 03, 2013, 06:44:19 AM »

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College Savings Plans

on: December 02, 2013, 12:13:21 pm

I posted in the kids forum, but it doesn't seem there is much traffic there right now. 
 

I know college savings plans are a bit controversial in this forum, however, my wife and I think this is the way we want to go for our newborn.  I'm starting to learn about fund fees and their effect on returns.  I would like some feedback on the plan offered in my state.

The fund that I am considering is a 529 plan and has a 10.00 annual fee, and underlying expenses of .67%.  Total Annual Assett Fees of .87%.   If I use this plan that is offered by my state of residence (Maryland) I qualify for a state tax deduction of up to 2500.00.  If I go to another state's fund, I may find lower fees, but will not qualify for the tax deduction.  While the funds expenses seem high, I think it's offset by the tax deduction.  What are some thoughts about this?

Dezrah

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Re: College Savings Plans
« Reply #1 on: December 03, 2013, 07:42:37 AM »
I've not looked into college savings (no kids) but I suspect the answer can be found by using spread sheets.  Make a column for each scenario, apply taxes, rates of return, expenses, then see how much is left in your pocket as well and the plan itself.

Is it possible for you to contribute to your local plan up to the max deduction and then contribute to another cheaper plan?

Gin

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Re: College Savings Plans
« Reply #2 on: December 03, 2013, 08:56:56 AM »
Clark Howard made a list of which  529 plans are good for which State.  Here is the link
http://www.clarkhoward.com/news/clark-howard/education/clarks-529-guide/nFZS/

irrational

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Re: College Savings Plans
« Reply #3 on: December 03, 2013, 08:33:50 PM »
As a father to 3, let me ask: are you out of debt, maxing out your retirement plans, and on a good path to retirement? If not, then seriously reconsider saving for your child's education.

Your child may receive a full scholarship, she might decide that a tradional college isn't for her (and instead go to culinary school), or perhaps she decides to finance her own way through college while working part time.

If all else fails, she can finance her way through college with student loans. You cannot, neccasrily, get a loan to finance your retirement.

Just my 2-cents worth. The Misses and I, despite loving our three boys, are not intending on saving a dime for their higher education.
« Last Edit: December 03, 2013, 08:37:31 PM by irrational »

huadpe

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Re: College Savings Plans
« Reply #4 on: December 03, 2013, 10:19:30 PM »
For a newborn you're better going with an out of state 529 it looks like.  To compare, MD offers you a deduction, but has a 0.87 expense ratio + $10 annual fee.  If you use the NY (for sake of comparison) plan, you don't get a state tax deduction, but the expenses are 0.17% and no annual fee.

Let's say you deposit $2500/yr for 17 years into the account.  So $42500 in deposits.  Let's say with pre-fee growth that would grow to $60,000.

The tax benefit on using the MD plan is $125/yr assuming you're in the 5% bracket there.  So that's $2125.

So the question becomes is $2125 more than what it costs in extra fees to be in the MD plan?

Annual fees add to $170, so we're now at $1955. 

For year 17, the difference in expense ratios will cost you .006*60000=$360, so we're at $1595

For simplicity sake I'll lop off $4k a year going backwards from here on

Year 16 difference = .006*56000=$336, so we're at $1259

Year 15 difference = .006*52000=$312 so we're at $947

Year 14 difference = .006*48000=$288 so we're at $659

Year 13 difference = .006*44000=$264 so we're at $395

Year 12 difference = .006*40000=$240 so we're at $155

Year 11 difference = .006*36000=$216 so we're at -$61

and so on

This calculation is the best case for MD by the way, if you go higher or lower than $2500 a year, it tilts harder to out of state.  (Lower tilts because the annual fee becomes a bigger deal proportionately, and higher tilts because you're paying higher expense ratio and not getting tax benefit).

If the timeframe is short, there isn't enough time to have the expense ratio compound.  So for a 13 year old, you would go in state.  But for an infant, the 0.6% compounded over 17 years swamps the state income tax benefit.

umterp1999

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Re: College Savings Plans
« Reply #5 on: December 04, 2013, 07:06:05 AM »
Thanks for all the advice!  I have a lot of information to work with now.

letsdoit

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Re: College Savings Plans
« Reply #6 on: August 27, 2018, 11:09:57 AM »
Thanks for all the advice!  I have a lot of information to work with now.
\

i know this is a dead post. 
but we've been thinking about setting up a trust for baby,   instead of 529

that way if he wants the money to go into realestate or something, we can get it with no penalties