What to do with 529 accounts in Virginia after leaving advisor

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ProfessorDoktor1989
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Joined: Tue Nov 29, 2022 4:09 pm

What to do with 529 accounts in Virginia after leaving advisor

Post by ProfessorDoktor1989 »

In the spring my wife and I went through some major life transitions, and so we thought we would be wise to hire a financial advisor. We hired the friend of a friend. It was a major mistake. After six months we fired the advisor and his firm (Truist). We have consolidated our retirement and taxable investment accounts at Fidelity, where I have my workplace retirement accounts; some of my wife's retirement accounts rolled over to Fidelity and her new accounts are with the Thrift Savings Plan and FERS.

The 529 accounts are the major sticking point about which I could use some advice. We have two children. The advisor wanted us to consolidate all our college savings at American Funds (held by the Capital Group and "sponsored" by Virginia529). We rolled over larger 529 accounts from Virginia529 for each child, as well as smaller 529 accounts held by Wealthfront. The smaller accounts were charged a front-end load of 3.6%! Thankfully the larger accounts were not. But the advisor never mentioned this, and obviously that kind of front-end fee, including for all future contributions, kills any return. All for the advisor to park the money in a target date fund. The accounts are currently held in class 529A shares (CTHAX and CCFAX). The 2030 target fund has an expense ratio of 0.68%.

Two questions about what to do next.

1. I would really like to move away from American Funds. My understanding, though, is that "rollovers" like this are only allowed once per year. So I assume I have to wait 12 months after the date of the last rollover to do this. That would be roughly mid-fall 2023. Is that correct? Or is there some way out College America without taxes and fees?

2. Where do I send future contributions? Virginia allows income tax deductions of $4k per beneficiary per account owner (with unlimited carry forward), which means a savings of roughly 2 x $4k x 5.75% = $460 for us. I could simply open two new Virginia529 accounts and start contributing there. The expense ratio for a 2030 target-date fund is 0.311%. Or I could open an account at Fidelity, which would be investing in the New Hampshire plan. Expense ratio for a target-date fund there are 0.14%, but it gives up the Virginia income tax advantage. There's no way I'm putting more money into College America, because of the front-end load on the A shares; the C shares have an even higher expense ratio and a back-end load of 1% if you keep them for less than a year.

Any advice you have would be appreciated.
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anon_investor
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Joined: Mon Jun 03, 2019 1:43 pm

Re: What to do with 529 accounts in Virginia after leaving advisor

Post by anon_investor »

ProfessorDoktor1989 wrote: Fri Dec 09, 2022 8:01 pm In the spring my wife and I went through some major life transitions, and so we thought we would be wise to hire a financial advisor. We hired the friend of a friend. It was a major mistake. After six months we fired the advisor and his firm (Truist). We have consolidated our retirement and taxable investment accounts at Fidelity, where I have my workplace retirement accounts; some of my wife's retirement accounts rolled over to Fidelity and her new accounts are with the Thrift Savings Plan and FERS.

The 529 accounts are the major sticking point about which I could use some advice. We have two children. The advisor wanted us to consolidate all our college savings at American Funds (held by the Capital Group and "sponsored" by Virginia529). We rolled over larger 529 accounts from Virginia529 for each child, as well as smaller 529 accounts held by Wealthfront. The smaller accounts were charged a front-end load of 3.6%! Thankfully the larger accounts were not. But the advisor never mentioned this, and obviously that kind of front-end fee, including for all future contributions, kills any return. All for the advisor to park the money in a target date fund. The accounts are currently held in class 529A shares (CTHAX and CCFAX). The 2030 target fund has an expense ratio of 0.68%.

Two questions about what to do next.

1. I would really like to move away from American Funds. My understanding, though, is that "rollovers" like this are only allowed once per year. So I assume I have to wait 12 months after the date of the last rollover to do this. That would be roughly mid-fall 2023. Is that correct? Or is there some way out College America without taxes and fees?

2. Where do I send future contributions? Virginia allows income tax deductions of $4k per beneficiary per account owner (with unlimited carry forward), which means a savings of roughly 2 x $4k x 5.75% = $460 for us. I could simply open two new Virginia529 accounts and start contributing there. The expense ratio for a 2030 target-date fund is 0.311%. Or I could open an account at Fidelity, which would be investing in the New Hampshire plan. Expense ratio for a target-date fund there are 0.14%, but it gives up the Virginia income tax advantage. There's no way I'm putting more money into College America, because of the front-end load on the A shares; the C shares have an even higher expense ratio and a back-end load of 1% if you keep them for less than a year.

Any advice you have would be appreciated.
When we lived in Virginia we used the Virginia Invest529 (https://www.virginia529.com/invest/invest529/), which is eligible for the $4k deduction per account. Instead of using expensive age based portfolio we just bought the Vanguard index fund options:
https://www.virginia529.com/invest/performance/#index

You can build your own 3 or 2 fund portfolio for maybe 10 basis points or less.

Don't give up that Virginia tax deduction, it is one of the best around. My spouse and I each opened up separate plans for our kids so we got an $8k tax deduction per kid.
mhalley
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Joined: Tue Nov 20, 2007 5:02 am

Re: What to do with 529 accounts in Virginia after leaving advisor

Post by mhalley »

The load is a sunk cost, so just forget about that for now. So you would only be paring the regular ER for the next year. Turn off reinvestment of dividends while waiting for the 12months to pass.
There is a way to get around the 12 month rule, by rolling the 529 to another family member. So you could roll child ones bad 529 to child twos good 529. I don’t know if you could do both of them at once, if they will notice that you are trying to get around the 12 month rule. But it seems to be a legal way to skirt the rule.
To avoid paying taxes and penalties on a 529 rollover if you’ve already done one in the last 12 months, you’ll just need to designate another qualifying family member as the beneficiary on the new account. According to IRS Publication 970, this can be a sibling, spouse, or even a first cousin. Beneficiary changes can be done as often as you need, so after you roll over your funds you can simply change the beneficiary back to the first child.
https://www.savingforcollege.com/articl ... %20account.
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