High Fee State 529 Plan vs. Brokerage

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COBanker31
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Joined: Fri Jul 02, 2021 1:13 pm

High Fee State 529 Plan vs. Brokerage

Post by COBanker31 »

Married filing jointly at top of 24% in 2020. Husband is ramping up a new portfolio that should greatly increase his bonus likely putting us in the 32% bracket beginning in 2022.

Colorado has a 4.63% state income tax for total marginal tax burden of 28.63% this year and likely 36.63% beginning next year.

In Colorado the 529 plan contributions are tax deductible, however, despite the plan being with Vanguard through College Invest (Not sure if this is allowed but link to fee schedule https://www.collegeinvest.org/529-savin ... 20Account. the fees of 0.71% plan fee plus a fund fee are quite high. The fund choices appear to all be funds based on risk level (aggressive growth, moderate growth, etc) and do not allow for individual fund choices.

We had planned to start a 529 for my infants this year with year end bonuses. We were going to split a large initial contribution between 2021 and 2022 to avoid reporting on gift taxes. My understanding is my husband and I can gift each of our children $29,999.99 and be under reporting for gift taxes. The plan was to put 29,900 (to be safe) in December and again in January for each kid. We would continue to do so until balance reached 80% of current cost of 4 year college and then allow compound interest to do the rest.

Now we are not so sure if this is the best option due to withdrawal rules and any potential scholarships that might get awarded. Both my husband (athletic) and I (academic) went to college on scholarships. His tuition, meal plan, and living was covered 100% and mine covered 80% of tuition and on campus living.

I know it is far too early to know if they would receive scholarships as both kiddos are under the age of 1, however, it is entirely possible for either to get a scholarship or decide to go to trade school (or no school). In that case there would be a lot of money locked up with a 10% withdrawal penalty and also too early to count on passing it on to potential grandchildren.

Would it better to just invest the entire amount in a brokerage fund utilizing low cost 3 fund portfolio?

Based on our tax situation would 4.63% tax deduction over the few years of contributions required outweigh 0.71% annual fee over 17-18 years?

Any benefits to brokerage account other than the excess balance can be withdrawn penalty free and portion of any excess could be gifted to each child to help them get a head start upon graduation?

Are there any other potential considerations in this decision?

Any advice welcome.

Thanks,
Mr. and Mrs. COBanker31

Edit: Bolded area modified for further clarification. For instance we would save until we hit $80k if current 4 year tuition was $100k and let compounding do the rest.
Last edited by COBanker31 on Wed Aug 04, 2021 7:53 am, edited 1 time in total.
Beachdrinks
Posts: 24
Joined: Thu Jan 04, 2018 1:23 pm

Re: High Fee State 529 Plan vs. Brokerage

Post by Beachdrinks »

You can choose any states 529. The only reason to use your home state would be a tax discount.

Find a state with low fees and Vanguard like NY :)
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ranger3
Posts: 32
Joined: Wed Jul 14, 2021 9:21 pm
Location: Great Lakes

Re: High Fee State 529 Plan vs. Brokerage

Post by ranger3 »

One consideration you haven't mentioned is that if your children do both receive scholarships, you are able to withdraw the amount of the scholarship without paying a penalty on that amount. You still owe tax on the gains, but no penalty. So this levels the playing field with a taxable account.

Additionally, there are plenty of qualifying expenses that would more than likely not be covered by any potential scholarship. Any amount remaining can be left in the account to keep growing, and you can change the beneficiary on the account to any future grandchildren. Or, maybe your children will decide to go to grad school.
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sycamore
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Re: High Fee State 529 Plan vs. Brokerage

Post by sycamore »

COBanker31 wrote: Wed Aug 04, 2021 7:45 am ...My understanding is my husband and I can gift each of our children $29,999.99 and be under reporting for gift taxes. The plan was to put 29,900 (to be safe) in December and again in January for each kid.
Minor technical comment: the exclusion in 2021 is $15,000, so $30,000 for the both of you. It's only if you give above the exclusion that you would need to report it.
sycamore
Posts: 6359
Joined: Tue May 08, 2018 12:06 pm

Re: High Fee State 529 Plan vs. Brokerage

Post by sycamore »

COBanker31 wrote: Wed Aug 04, 2021 7:45 am In Colorado the 529 plan contributions are tax deductible, however, despite the plan being with Vanguard through College Invest (Not sure if this is allowed but link to fee schedule https://www.collegeinvest.org/529-savin ... 20Account. the fees of 0.71% plan fee plus a fund fee are quite high. The fund choices appear to all be funds based on risk level (aggressive growth, moderate growth, etc) and do not allow for individual fund choices.
It appears Colorado offers several 529 plans: https://www.collegeinvest.org/529-savings-plans/

The plan you linked above (Stable Value Plus) has the 0.71% plan fee, but the CollegeInvest Direct Portfolio has a lower fee of 0.31% (this appears to be the "all-in" amount -- see https://cdn.unite529.com/jcdn/files/PDF ... losure.pdf page and search for "Annual Asset-Based Fees as of August 1, 2021").

Worth a look...
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