If there’s a future college student in your household, you probably know that 529 is numeric for “tax-advantaged educational investment account.” But did you know that you can utilize the 529 of any of the 50 states? That’s a lot of choice, so which one is the best, meaning best for you? Morningstar has just released its annual survey, and our own analysis goes farther. Here’s what you need to know.
Beyond all the marketing language and state flag-waving you may find on state 529 web sites, three criteria fundamentally drive 529 performance:
State tax breaks are a distant fourth. Yes, some states like Rhode Island offer a tax benefit for residents who use the local 529, but the breaks are so small compared to the total cost of education that they don’t make a material difference.
It does cost money to administer a 529 plan. We just want to make sure you pay only what is necessary. Massachusetts, Utah and Nevada come in at 9, 17 and 19 basis points, respectively. These are all reasonable based on the value of the service provided.
All three states offer a broad menu of index choices at rock bottom expense ratios. The three menus offer global diversification choices in equity and fixed income. You and/or your advisor can design the allocation that fits you best.
Cost rules. Fees are one of the strongest predictors of performance, as Vanguard and others have documented. On average, lowest cost funds tend to do the best over time because they are…lower cost. Again, all three states offer the lowest cost index options, ranging from 10-30 basis points.
Why is it so important to get these details about cost and choice so right in your 529? Will it really make that much difference? After all, you might say, the 529 goes away after the kids finish college.
Well, maybe not. In fact, there is a huge opportunity for a far-thinking family to establish an “endowment 529” for use by current and future family members. Always there, always escaping taxes, always ready for the next generation of learning. It’s not hard to do, only requiring that you wisely manage owners and beneficiaries. By combining a long time horizon and a sound investment plan, it can reach a size where it no longer needs funding. It just funds.
It’s hard to imagine a better use of personal assets. Call me (617-217-2772) if you would like to hear more.
PS – I’ve put in a few helpful links on common 529 plan questions:
John Osbon- Josbon@osboncapital.com