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529 Plans: Fees More Important than Deductions
Posted By Jim On 07/23/2008 @ 6:27 am In Education | 5 Comments
My friend just had their first child and began researching 529 plans. A 529 plan is an education savings plan run by a state or an educational institution, it’s named after Section 529 of the Internal Revenue Code. The plan offers tax benefits to individuals saving for future education. In his case, he was looking at a savings plan, rather than a prepaid plan* .
And now he had a choice: an in-state plan with a tax deduction or an out-of-state plan with potentially cheaper funds. Specifically, he wondered if he should open a Maryland 529, which offers a tax deduction to Maryland residents, or a state plan offering Vanguard funds, which is known for lower mutual fund fees. The state plan he found was Nevada’s, which is run by Upromise but offers Vanguard funds. (Plan data provided by Saving For College , run by Bankrate)
Comparing just the Nevada plan against the Maryland plan, it appears that the Maryland plan is superior. What you’re trading off is the tax deduction versus the mutual fund fees, but the tax deduction is only available the year you contribute. In Maryland, the $2,500 deduction is worth $125 (5% state income tax) making it nearly a wash between the slightly higher account fees in Nevada.
It’s really a choice between T. Rowe funds vs. Vanguard funds. If you’re an index fund type of investor, the T. Rowe Price Equity Index 500 (PREIX ) has an expense ratio of 0.35%. Vanguard’s 500 Index (VFINX ) expense ratio is 0.15%, meaning T. Rowe’s ratio is more expensive by 0.20%. On a balance of $10,000, that’s a difference of $20 being whisked out of the account each year for nothing. While $20 doesn’t seem like much, that’s a fee taken out each year and one that will erode your investment’s growing potential.
If it were me, I think the Nevada plan is superior of the two because it offers access to cheaper Vanguard funds.
Liz Pulliam Weston of MSN money recently looked at the 5 best college savings plans  and listed Nevada as one of the top five. The other states included were Alaska, Nebraska, Rhode Island and Virginia. The Virginia plan offers access to some Vanguard funds too.
* A prepaid plan is an option where you “lock in” the price of an in-state public college education right now. You can always convert it to a private or out of state school later on based on some conversion tables.
(Photo: lednew )
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 prepaid plan*: #prepaid
 Saving For College: http://www.savingforcollege.com
 PREIX: http://finance.google.com/finance?client=ob&q=MUTF:PREIX
 VFINX: http://finance.google.com/finance?q=VFINX&hl=en
 5 best college savings plans: http://articles.moneycentral.msn.com/CollegeAndFamily/SavingForCollege/The5BestCollegeSavingsPlans.aspx
 lednew: http://www.flickr.com/photos/lednew/2639219132/sizes/m/
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