529 Plans!

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Girl on college campus. Photo by Victoria Heath on Unsplash

Opening a 529 plan is one of the best investments you can make for your child. In a 529 plan money grows tax free and can be used tax free for educational expenses. Also, in many states you can also claim a tax deduction or credit on state income taxes.

Opening a 529 plan early for your child means leveraging time to compound the growth of your savings plus not paying taxes on the gains. This will make affording higher education in the future much easier.

If you live in Illinois or one of the following states, the Illinois Bright Start Direct-Sold College Savings Program could be right for you: Alaska, Arizona, Arkansas, California, Delaware, Florida, Hawaii, Kansas, Kentucky, Maine, Minnesota, Missouri, Montana, Pennsylvania, Nevada, New Jersey, North Carolina, South Dakota, Texas, Washington, and Wyoming.

The states just listed either:

  • Don’t have a state income tax
  • Don’t give a tax deduction or credit on state income tax for contributions to a 529 plan
  • Will allow you a tax deduction or credit for contributions to any owned 529 plan

Do you live in one of these states?

For folks living in these states that want to open a 529 Savings Plan, the Illinois plan is a great low cost option. If you live in another state, check out your state’s 529 plan(s) to get the best state tax deduction/credit savings. If you have questions about the best plan for another state, leave me a comment. I’ll look into it and get back to you.

Opening an Illinois Bright Start Direct-Sold College Savings Program is easy-ish and the best part is that it is practically free to do. You can open the account for free and contribute as much as you can afford, even if it’s $20 a month. We will walk through the Why, When, Which, Who of a 529 plan and how to allocate.

Why?

The reason you want to open a 529 Plan is because its one of the most tax efficient ways to save for future college expenses. By 2039 (!!) when baby Moneyaire is ready to head off to college, the cost of higher education is estimated to be around $250k to $400k!! Its a crazy amount of money and investing in a 529 plan will help reduce that burden.

529 plan money can be used at universities, colleges, trade schools and apprenticeship programs for tuition and room and board. It can buy school materials like books and laptops too.

So which one should I open?

Among the many reasons to go with the Illinois Bright Start Direct-Sold College Savings Program:

  1. There is a low .07% management fee for having an account. There is an additional .03% fee when you use non-index funds. I originally thought there wasn’t one and I was mistaken.
  2. There are many funds within the Bright Start program that have low fees associated to them.
  3. Specific to Illinois residents, every year Illinois taxpayers can deduct contributions made to Bright Start up to $10,000 per individual taxpayer or $20,000 for a married couple filing jointly.

UGMAs and UTMAs vs. 529 Plans

You might be wondering if a Uniform Gift to Minors Act or Uniform Transfer to Minors Act account may be another option. Here are some reasons why those options don’t compare to Bright Start:

  • You won’t benefit from the state tax deductions.
  • You can’t transfer the funds from these accounts to another child.
  • Earnings above the first $1,100 are subject to taxes. For kids, it’s going to be a smaller tax rate than for parents. However, unearned income above $2,200 is taxed at the parent’s rate.
  • If interest and dividend income comes to less than $11,000, the parent can include that income on their return. On the other hand, 529 money grows tax free.
  • Unlike with 529 plans, the money withdrawn to pay for education from UTMAs or UGMAs will be taxed. Also these assets would count against a child’s financial aid consideration by nearly 4 times than money in a 529 plan. Assets in a 529 count against a child’s financial aid consideration by 5.64%. UTMA/UGMA would have a 20-25% impact.

You can also open a brokerage 529 account (i.e., with Fidelity, Vanguard etc.). However, if it’s not a Bright Start account you won’t get the tax benefit in Illinois. There are also managed account options, but they have management fees associated to them and the Moneyaires have an allergy to unnecessary fees.

When is the best time to start a 529 plan for my kiddo?

Yesterday. The next best time? Now. Seriously. Don’t worry about timing the market. Don’t worry if you can only do $5 or $10 a month right now. The earlier you get started the longer your investments can compound. It’s also possible to create a 529 account before your child is born by making the parent both the owner and beneficiary; after the child is born you can switch the beneficiary to the child. A 529 contribution at the baby shower, perhaps??

How do I open a 529 for my kiddo?

The Bright Start Savings Program allows a person, typically a parent or grandparent, to open an account for a child. Parents are typically the account owners and their child(ren) the beneficiary. Its highly recommended that the custodial parent be the owner of the account or the student themselves. If this is the case the 529 Account will only count against financial aid by 5.64%.

Otherwise…

Distributions from a 529 not owned by the student or custodial parent could mean a 50% reduction in aid amount based on the amount received. Most commonly, grandparents may have a 529 plan set up for a grandchild. Well meaning grandparents may inadvertently cause a negative impact in FAFSA with their 529 Plan distribution. This is because these distributions will count as part of a student’s income and is referred to as the “financial-aid trap.”

In the Consolidated Appropriations Act of 2021, distributions from grandparents would no longer count against a student’s FAFSA because the new FAFSA forms wouldn’t have a place to put this information. This was supposed to take effect in October of 2022, however this change has been delayed. For now, parents should be the account owner and grandparents can contribute to the plan. I’ll keep a lookout on changes and post updates when I see them.

Steps to Open an Account

It’s very easy to open an account. You’ll need a few things to get started:

  1. Account Owner Info
    • Address
    • Social Security or Taxpayer Identification Number
    • Date of Birth
    • Phone Number
    • Email Address
  2. Beneficiary Info
    • Address
    • Social Security or Taxpayer Identification Number
    • Date of Birth
  3. Successor Account Owner Info (in case the original owner dies)
    • Address
    • Date of Birth
    • Phone Number
    • Email Address
  4. Contribution Info
    • Bank Name
    • Bank Routing Number
    • Your Bank Account Number

When you have this info together…

Go to the Bright Start site. Click on the button that says “Open an Account” in the upper left hand corner. You’ll be asked to create a username and password and then you’ll be asked to input the information above.

I HIGHLY recommend that you set up an auto draft when you open the account, even if its just $20 or $10 a month. You can always increase (or decrease) that contribution but it would really stink to go through this whole process and accidently not contribute anything for months or years after initially opening the account.

So how should I allocate the 529 money?

When a managed account or mutual fund has a 1% or even .5% fee, it doesn’t seem like much. Over time, however, those fees really add up, costing hundreds or thousands of dollars; money that could have otherwise been growing for you. The low fees of Bright Start make it a great option to efficiently invest.

At the end of this post is a table of most of the available funds and the fees they charge. The Age-Based Vanguard Funds are the most cost efficient pre-packaged funds. If you want to go with an established fund, go with anything Vanguard Age-Based depending on your risk tolerance and child’s age. The funds will charge anywhere from .12% to .15%.

For an aggressive mix with at least a 15 year timeline, check out the table below. As a fee conscientious investor I opted to select my own individual funds (all Vanguard of course!). It’s the mix I chose for our family which costs a fraction of the cheapest Vanguard packaged fund and hopes to capitalize on stock market growth.

The Moneyaire 529 Mix

To use the “Moneyaire 529 Mix”, go to individual funds in the Investment Options section. We’re going to skip the Age-Based and Target Funds and select Individual ones. This is the mix I opted for:

Fund NameExpense RatioAllocationRationale
Vanguard Total Intl Bond Index 529.07%10%Has the best returns of the other two available Vanguard bond funds
Vanguard 500 Index 529.02%40%Diversification amongst the biggest 500 public companies in the US
Vanguard Total Intl Stock Index 529.07%10%Adding international to the mix for diversification
Vanguard REIT Index 529.10%15%Real Estate Investment Trusts offer nice royalties, typically higher than bonds
Vanguard Total Stock Mkt 529.02%25%Diversification amongst all 3,000+ companies publicly listed.
Total.042%100%

Why I Custom Built My Portfolio

I wanted a good mix of funds. This allocation is very aggressive and I’m hoping to capitalize on my long investment horizon as well as the lower fees I’ll be paying over that period. I’ll review my allocations and readjust as necessary. Just to be clear, my allocations are by no means perfect or “right.” There’s no guarantee that this allocation will do better or worse than the other available options and it could actually lose money. It’s also very flexible. Want a higher bond allocation? Up the allocated % from stocks to bonds.

Overall, the total fees are less than half as much as the cheapest age-based funds and are very similar to how some of the other funds are laid out. As of August 13, 2021 (baby Moneyaire is nearly 11 months old), this mix has earned baby Moneyaire’s account a nearly 26% return 🙂

Conclusion: Open a 529 Plan!

Setting up your allocation is the hardest part of the whole process. I hope I’ve made that process easier for you. The rest of the application is pretty straightforward.

I’ve helped several families open up 529 Plans, and here are some common questions I get: 15 Answers to 529 Plan Questions.

In this post, I walk you through how to allow others to contribute to your kiddo’s 529 plan.

Good Luck!! Hit me up in the comments section with your questions.


List of Fund Fees in the Illinois Bright Start Direct Sold 529 College Savings Plan

Below is a table of the available funds and their fees. I did not list all of the Age-Based Multi-Firm Fund fees as there are a lot of them and the range in fees goes from .26% to .46%. There is an additional .03% fee added to non-index funds.

TypeFund NameFee
Age BasedVanguard Aggressive Age-Based (Index Strategy) 0 – 20.12%
Age BasedVanguard Aggressive Age-Based (Index Strategy) 3 – 50.12%
Age BasedVangaurd Aggressive Age-Based (Index Strategy) 6 – 80.12%
Age BasedVanguard Aggressive Age-Based (Index Strategy) 9 – 100.13%
Age BasedVanguard Aggressive Age-Based (Index Strategy) 11 – 120.13%
Age BasedVanguard Aggressive Age-Based (Index Strategy) 13 – 140.12%
Age BasedVangaurd Aggressive Age-Based (Index Strategy) 15 – 160.13%
Age BasedVanagurd Moderate Age-Based (Index Strategy) 17 – 180.13%
Age BasedVanguard Aggressive Age-Based (Index Strategy) 15 – 160.13%
Age BasedVanguard Aggressive Age-Based (Index Strategy) 17 – 180.12%
Age BasedVangaurd Aggressive Age-Based (Index Strategy) 19+0.13%
Age BasedVanguard Moderate Age-Based (Index Strategy) 0 – 20.12%
Age Based Vanguard Conservative Age-Based (Index Strategy) 19+0.15%
Age BasedAggressive Age-Based (Multi-Firm Strategy) 0 – 20.46%
Age BasedModerate Age-Based (Multi-Firm Strategy) 19 plus0.32%
Age BasedConservative Age-Based (Multi-Firm Strategy) 19+0.26%
TargetTarget Vanguard Index Equity Portfolio0.12%
TargetTarget vanguard Index Balanced Portfolio0.13%
TargetTarget Vanguard Index Fixed Income Portfolio0.15%
TargetTarget  Multi-Firm Equity Portfolio0.46%
TargetTarget Multi Firm Balanced Portfolio0.44%
TargetTarget Multi Firm Fixed Income0.26%
IndividualVanguard Federal Money Market Fund0.11%
IndividualBaird Short Term Bond Fund0.30%
IndividualVanguard Short-Term Inflation-Protected Securities Index 529 Portfolio0.04%
IndividualVanguard Total Bond Market Index 529 Portfolio0.03%
IndividualDodge & Cox Income Fund 529 Portfolio0.42%
IndividualVanguard Total International Bond Index 529 Portfolio0.07%
IndividualDFA U.S. Large Cap Value 529 Portfolio0.22%
IndividualVanguard Institutional Index Fund0.02%
IndividualVanguard Total Stock Market Index 529 Portfolio0.02%
IndividualT. Rowe Price Large-Cap Growth 529 Portfolio0.56%
IndividualAriel 529 Portfolio0.72%
IndividualDFA U.S. Targeted Value 529 Portfolio0.33%
IndividualVanguard Explorer Fund0.30%
IndividualVanguard Total International Stock Index 529 Portfolio0.07%
IndividualDFA International Small Company 529 Portfolio0.44%
IndividualVanguard Real Estate Index 529 Portfolio0.10%
All data based on August 15, 2021 review of these funds. Subject to change.