As you can tell from reading the title, I confess to being 3 years late opening a college savings account (529) for my daughter. I guess I found myself a little confused about exactly how to go about it and never spent the time to figure out what the best plan of attack would be. Well, I finally did some analysis and jumped on board.
The state that I live in (Washington st) only has one college savings plan called GET (Guaranteed Education Tuition). I have never been too hot on it. Basically it lets you buy tuition at today’s prices (although it seems like the price is a bit inflated right now) and then guarantees that your tuition is covered at any Washington state school later. (Actually, it may even let you attend out of state colleges but I’m not sure). Anyway, like I said, I’m not real hot on that plan.
So, I went to savingforcollege.com and started reviewing various state’s plans. You can enroll in any state’s plan even if you don’t live in that state. In some states you may find that there is an additional advantage for being a resident in that state, but that usually equates to a state income tax break on any contributions. I don’t have an income tax in my state and that really wasn’t a consideration.
I opened an account online at collegeadvantage.com. This is the Ohio program and was rated as having some of the lowest fees of any state plan and also had some good investment choices. Index funds were an important consideration for me and they have a decent selection of Vanguard funds. I have set up the account to contribute $150 per month and also put some money in there to begin with. We’ll probably increase our contributions and make some “one time” contributions as time goes on. We will also make sure that all her grandparents and extended family members know about it in case they’d like to help contribute to her future college costs.
For those of you that aren’t familiar with a 529 plan, it’s basically a way to invest after tax money in to an account and face no tax consequences at all when money is withdrawn to pay for the beneficiary’s education costs. You can choose any family member as a beneficiary and can change that beneficiary if plans change later. If you ever want to withdraw the money, you can withdraw all contributions without tax consequences but will pay regular taxes on all gains, plus a 10% penalty. Obviously you should consult a tax advisor for the full details. (and assuming this post lives on for a long time it’s also good to contact a tax advisor for current information)
Comparing the fees are quite a hassle for 529 plans. Some of the plans include 529+fund expenses together. Others separate them out. And then some splits it out into 3 layers. On savingforcollege.com, there’s a good PDF that shows a summary of what fees would be on $10K over 10 years. Too bad I didn’t see this summary first — would have saved me a lot of trouble.
http://newsletter.savingforcollege.com/mo-20070220/fee_table_comparison_chart.pdf
And yes, I also picked the OH plan for my son. I like the low minimum ($15) and the decent choice of funds. I wish I could overweight in value but I can see why state plans would want to limit choices to avoid people trying to time the market.
An added concern is that the administrators for 529 accounts can change with time. California’s just went from TIAA-CREF to Fidelity. But it’s not that hard to move from one to another. Ohio definitely seems like one of the better ones if you don’t have state-specific benefits.
That’s a good point Jonathon. I thought about that a little when I signed up but figured there isn’t a lot I can do about that. If Ohio changes their plans, I’ll consider moving the assets in to another state’s plans for sure.