Part I of this three-part series reviews 529 plan basics. Part II examines Washington State’s 529 prepaid tuition plan, the GET. This final section focuses on the best 529 savings plan I know, the West Virginia Smart529 Select.
Five years ago, my younger sister gave birth to her first child, a beautiful baby girl named Sydney. I was there at the hospital right after Sydney was born, and I instantly fell in love with her. When her 1st birthday came around, I decided the best gift I could give to her was the gift of education (or at least help with it). I set up a 529 account and began making monthly contributions for her benefit. My examination of 529 plans four years ago led me to the West Virginia Smart529 Select, and I believe it’s still one of the best 529 plans available today.
Why the West Virginia Smart529 Select?
I like the WV Smart529 Select plan for three main reasons:
- It offers access to a world-class family of funds, Dimensional Fund Advisors (DFA).
- The costs are low and very reasonable.
- Set-up, maintenance and contributions are simple and easy.
Dimensional Fund Advisors (DFA)
The WV Smart529 Select is the only 529 plan in the country where 100% of the investment options are DFA funds. Clients who work with Merriman may recognize these as the same funds we use in our investment portfolios. DFA funds are rooted in the science of investing, and we believe they offer superior exposure, diversification and returns when compared to most other mutual funds and Exchange-Traded Funds. Ordinarily, you can’t get access to DFA funds unless you are an institutional client or you work with a DFA-registered advisor. However, through the WV Smart529 Select, all investors have access to this great fund family for college savings purposes!
The WV Smart529 Select has no sales charges, application fees or set-up charges. There is a $25 annual maintenance fee, but that is waived if you enroll in their Automatic Investment Program and contribute $25 or more each month, if the account value is $25,000 or more, or if you’re a resident of West Virginia. The annual program expense ranges from 0.65% to 0.88% of the account balance each year, depending on the investment options chosen—very reasonable for this type of plan.
Set-up, maintenance and contributions
Setting up a WV Smart529 Select account was a breeze. I was able to establish and fund the account directly online, and also enrolled in the Automatic Investment Program which transfers money from my bank account into the 529 account each month. The minimum initial investment to open an account is very low, only $250.
The plan also makes investing simple by offering Age-Based Portfolios, which are managed by DFA and automatically shift in allocation every 3 years as the beneficiary grows older. For example, when the child is between 0-3 years of age, the portfolio will be invested in 100% stocks. When the child turns 19 or older, the portfolio will be 20% stocks, 80% bonds and cash. This provides for greater growth potential while the child is younger, but increases capital preservation potential as the child approaches college. The plan also offers Static Portfolios that don’t change with age, but for my money the Age-Based Portfolios are a simple and elegant solution.
Four years into it, I’m still making monthly contributions into my niece’s WV Smart529 Select account. I intend to continue this until she finishes college, wherever she may go. She probably won’t realize all of the thought that went into selecting this plan for her; she may simply know that her uncle loves her and has planned ahead for her future. I, however, will know that I have used the best tool for the job, and that gives me tremendous satisfaction.
While all 50 states offer some type of 529 plan, only 18 states offer the prepaid tuition variety. Some of these prepaid tuition plans are now closed to new enrollment, but Washington’s Guaranteed Education Tuition (GET) plan is still available to Washington residents (and WA residents only). It is only one of five prepaid tuition plans in the country that is guaranteed by the full faith and credit of the state. The GET was created in 1998 and is Washington’s only 529 plan.
How GET works
In a nutshell, account owners can purchase up to a maximum of 500 GET “units” at a specified price and redeem those units for college expenses in the future. 100 units represent the cost of one year of resident, undergraduate tuition and state-mandated fees at Washington’s most expensive public university (either the University of Washington or Washington State University). Individual units are worth 1/100th of that cost. For the 2011-2012 academic year, GET units paid out at a rate of $102.23 per unit. Account owners can use up to 125 units per year, plus any rollover units from a prior year, to pay the cost of qualified education expenses.
At Merriman, we often help our clients plan for more than just retirement. One topic that commonly comes up is saving for college. My colleague, Lowell Lombardini Parker, wrote about the various college savings options in an earlier post, and this three-part series will focus specifically on the 529 plans highlighted in his article. Part I will review 529 plan basics; Part II will evaluate Washington’s 529 prepaid tuition plan, known as the GET; and Part III will take a look at the best 529 savings plan we know – the West Virginia Smart529 Select. (more…)
High school seniors are now in the process of getting acceptance letters to colleges.
When the thick envelope comes, there will be well-deserved joy, possibly followed by the dismaying thought on how to actually pay for those four expensive years.
Hopefully, parents will have done some advanced planning and saving for this major event. There are various strategies which can substantially ease the financial burden of higher education, some of which should be started many years before high school.
Before we discuss strategies, let’s review some key terms, as they say in school.
There are two major financial aid forms which could be completed. The first is FAFSA, the Free Application for Federal Student Aid. This has to be submitted to be considered for any federal financial aid. It can be completed as early as January of the child’s senior year in high school. FAFSA assumes that 5.64% of parental assets can be used to fund annual college expenses, while the assessed rate on the children’s assets is a much higher 20%.
In today’s competitive job market, saving for your child’s higher education is as important as ever. Although there are not an overwhelming number of savings choices, the subtleties between them are paramount. Below you will find what we at Merriman feel are the most important distinguishing characteristics between 529 plans, Coverdell ESA’s and UGMA/UTMA accounts.
|529 Plan||Coverdell Education Savings Account (ESA)||Uniform Gift/Transfer to Minor Account (UGMA/UTMA)
|Investment options available||There are two types of 529 plans: 1) 529 savings plans, where the mutual fund investment choices are dictated by state run allocation programs, 2) 529 prepaid plans, which allow you to purchase tuition credits at prevailing rates. ||Investment options include individual stocks, CD's, or mutual funds. Precious metals, collectibles, partnerships in private business and direct ownership in real estae are not permitted.||These accounts allow for stock, bond, and mutual fund investments. However, stock options and buying on margin are not allowed.
|Contribution limits||You can currently contribute $13,000 per year. As an alternative, you can contribute $65,000 (five times the annual gift tax exclusion) without incurring gift taxes, but then cannot contribute for the next four years.||You can contribute a maximum of $2,000 annually. ||For 2011, contributions above $13,000 per year ($26,000 for married couples) are subject to gift tax.
|Donor income restrictions||There are no donor income restrictions.||Donor income restrictions apply.||There are no donor income restrictions.
|Tax implications||Assets grow tax-free and withdrawals are tax-free if used for qualified education expenses.|
Certain states offer tax incentives for investing in 529 plans.
|Contributions are not tax-deductible, but the account grows tax-free and withdrawals are tax-free if used for qualified education expenses.|
Both the Hope and Lifetime Learning tax credits are allowed in the same year as an ESA withdrawal is made.
|Contributions are not tax-deductible and they do not receive the tax benefits associated with 529 plans and ESA's.
|Restrictions on use of funds||Withdrawals are only tax-free when used for qualified education expenses.|
There is no age limit for investment disbursements.
|The assets can be used for eligible expenses from kindergarten through graduate school.||There is no requirement to use the funds for qualified education expenses.
When the beneficiary reaches the age of majority (usually 21, but could be 18 depending on the state), there are no restrictions on the use of withdrawals.
|Who owns the funds?||The account owner retains complete control of the assets and may change the beneficiary to an eligible family member of the original beneficiary. ||The account owner retains complete control of the assets and may change the beneficiary to an eligible family member of the original beneficiary||Assets are treated as belonging to the beneficiary, and will impact their ability to receive financial aid.