How we acquired so many accounts

In my family, nothing is more important that a good education.  Our son was born near the beautiful (but expensive!) Princeton campus, so we opened up a 529 Qualified Tuition Plan before he learned to sit up.  Ah, such enthusiastic new parents!  Unfortunately, I didn’t take any time to research the issue, and I assumed that you were supposed to invest in the 529 program sponsored by your state of residence, so we invested in New Jersey’s NJBEST College Saving Plan.

By the time we moved to New York, I knew that I could continue investing the New Jersey 529, but New York gave a state tax deduction if you invested in the New York plan, so while we enjoyed the hospitality of the Hudson Valley region, we bought into New York’s 529 College Savings Program Direct Plan.  

When we moved to Massachusetts, I couldn’t bear the thought of opening yet another account.  Massachusetts doesn’t give a tax deduction for 529 contributions (boo! hiss!) — surprising, considering that our state ranks #8 in the number of colleges per capita — so I plunked a couple of years worth of contributions into the New Jersey fund.

My partner and I keep separate accounts.  Because the Federal Government doesn’t recognize our marriage, I find it’s just simpler to track our finances separately.  Thus we currently have two NJ and two NY accounts.  That seems like a lot of overhead for just one small boy.

Could we simplify?

I would prefer to have fewer accounts and better investments.  It’s time I looked for a really good 529 program.

It turns out that I won’t be able to transfer funds out of the New York 529 plan without refunding New York the state tax deduction I received for the contributions.  Fat chance.  I’ll never pay that state a dime I don’t owe it, so the money will stay in the New York 529 account.  That means that I likely won’t be able to reduce the number of accounts.

529 Information Resources

The best resource that I’ve found is Morningstar’s guide to 529 Funds.  State-by-state, they track the expenses and performance of each fund.  It’s almost too much information to absorb.

The second best site is SavingForCollege.com, owned by Bankrate.com.   They rate each state’s program with 1-5 mortarboards, but the most useful information is only accessible to subscribers.

Kiplinger also compiled their top five favorite 529′s, but this article was written last summer.  In our fast-paced world, that is sooooo last decade.  They miss, for example, the fact that Fidelity cut its management fee in half last December.

This program moves to the head of the class….

Utah. For years, I’ve been hearing good things about the Utah plan.  They invest in low cost Vanguard index funds, and they recently lowered their already best-in-class management fees.  They also recently eliminated account fees for out-of-state investors who agree to receive their statements electronically.  While index funds aren’t exactly sexy, neither is a cap and gown, which is, after all, the whole objective of the plan.   Utah’s makes Morningstar’s list of best funds.  Saving for College.com ranked the out-of-state program 4 1/2 mortarboards, while the in-state Utah program received a perfect 5, with the addition 1/2 hat for the state tax break.  No out-of-state program for any state received the full five mortarboards.  The more I read the other state’s documents for 529 plans, the more I like the Utah plan.

…and these 529 Programs should go back to school

Massachusetts. Even though Massachusetts does not offer a state tax deduction for 529 contributions, I still felt obligated to check out my own state’s program.   Massachusetts offers a 529 through Fidelity with two age-based programs: one using managed funds and one using index funds, but unlike Utah, it doesn’t offer an aggressive / moderate / conservative variation within each category.  For each age group, it doesn’t clearly define how asset allocation will vary over time.  For each current investment fund, there is a pie chart showing the current asset allocation and beneath it are three stacked bar charts with no explanation — what the heck are these?  The program literature is not nearly as well-written as Utah’s.  The underlying funds in the managed portfolio average only three Morningstar stars (out of a possible five).  The index-fund based options are acceptable, but not as flexible as Utah’s.  The managed-fund based options have high fees for mediocre performance.

New Jersey. The NJ Best 529 College Savings Plan, might be the best New Jersey has to offer, but you can do better elsewhere.  The New Jersey program invests primarily in Franklin Templeton funds.  The portfolio recommended for a newborn will cost you 1.23%, or roughly, four times what the Utah program charges for a similar level of risk and (approximately) return.  Fuggeduboutit.

New York. The New York Direct Plan offers low cost Vanguard Index Funds (yea!) but charges 0.45 – 0.55% overhead (boo!  hiss!).  If you invest in the Aggressive Growth Portfolio, you are putting 100% of your kid’s money in an S&P 500 index charging 0.03% with a management fee of 0.52%  for a total of 0.55%.  Now, 0.55% may not sound like that much, but it’s eighteen times the expense ratio.  Ouch!

Summary

529′s are a great way to save for your child’s education.  If your state offers a tax deduction for investing in your state’s 529 program, it may be the best deal for you (if your state has low program management fees).  If not, then check out the program offered through Utah.  Low fees and an easy-to-understand program makes it a winner, IMHO.

Image credit: Unhindered by Talent at Flickr

Disclosure: No investments in any of the companies mentioned (Fidelity, Franklin Templeton, Vanguard, et al.) though I do hold investments through them, as discussed in the post.

Disclaimers: The above information is presented for educational purposes only and does not represent an endorsement of any of the products mentioned.  You can lose principal whan investing in any of the 529 programs listed above.  If you have questions about your specific situation, please write or consult a financial professional.

Editor’s notes: This post was updated 3/13, modifying some of my original recommendations.

Carnivals: This post was included in this week’s Carnival of Personal Finance.

College and the FAFSA

Even though our son is only in first grade, it’s never too early to worry about how we’re going to afford his college education. (After all, it’s a mother’s prerogative to worry). The Free Application for Federal Student Aid (FAFSA) is used by most colleges and universities to determine how much a student should pay towards the cost of his/her education. Many, if not most, middle- and even upper-income families receive some sort of financial aid.

It occurred to me today that since my marriage isn’t recognized by the Federal Government, could I legitimately include just one parent’s income on the form? I’m not trying to cheat, but I do believe that Uncle Sam can’t have it both ways. If they choose not to recognize my marriage (which will (hopefully) be in its 28th year by the time my son starts college) then they have chosen not to recognize my marriage.

Here’s the top of the form:

You can see that the sections are labeled for “Father” and “Mother”.  The federal government isn’t thrilled about citizens crossing out their forms and suggesting helpful annotations.  So what would I do?

A rose by any other name...

The answer, I believe, lies in the fine print at top defining “Parent”.  For the FAFSA, it seems “Parent” refers to the person who has the legal obligation for the student.  This is different, for example, than the IRS who cares more about who actually paid for a dependent’s care, rather than who should have paid.  If the student lived with a grandmother who paid for the care of the student but had not legally adopted him/her,  the grandmother could (probably) declare the student on her income taxes as a dependent, but the grandmother’s income and assets would not be considered for the FAFSA.  I think I get the logic, but it’s worth noting that (at least) two Federal organizations have different interpretations of “Parent”.

My partner and I are both legal parents of our child, so we should (and will) include our financial information.

However, if you live in a state where you cannot legally adopt your partner’s child, then you should feel no obligation to include your financial information on the FAFSA.  This would be small compensation for the lack of formal parental rights.  Imagine your child hurt and in a hospital and you are not allowed to be with them because you are not officially family.   Think about this for five seconds and you will see that paying for your child’s college expenses is a small price for the privilege of actually being a parent.

Summary

For a moment today, I thought I’d found a shortcut to pay for my child’s education.  Further examination into the question, and I realize it is my parental duty to report my income, too, on the FAFSA (even if I have to cross out Mother/Father and write in Thing1/Thing2*).   Finally, I reflect on how lucky I am that I live in a country at a point in history that I can be a parent.  I walk across the room and hug my puzzled son.  I’ll explain it to him someday.

*Tip ‘o the tall striped hat to Dr. Seuss.

Disclaimer: I’m not a lawyer.  I don’t even play one on TV.  This information is presented as educational and should not be interpreted as legal advice.