Back in June, 2011, we published a blog post that covered some of the basics of Section 529 College Savings Plans (“Good News For Contributors To The North Carolina 529 College Savings Plan”). 529 Plans can be great vehicles for college savings, due to their tax-deferred growth and the ability to withdraw funds tax-free for qualified education expenses (tuition, fees, room and board, etc.).
In that earlier post, we mentioned that while each state sponsors such a plan, people weren’t obligated to use their home state’s plan. People tend to seek alternatives when their home state’s plan carries high administrative or sales costs, or when the underlying investment options don’t fit their preference.
North Carolina’s 529 plan scores decently enough in terms of cost and investment options. But a significant attraction of the North Carolina plan was that state residents could deduct up to $2,500 of contributions ($5,000 for a married couple) from their state taxable income. This represented anywhere from a $350-$385 tax savings for most of our married clients. In fact, the purpose of that post in 2011 was to announce that the tax deduction would continue for residents, regardless of their income level. (Prior to 2007, the deduction was capped for people who made above a certain dollar amount.)
Unfortunately, as part of the overhaul of the state budget and tax system, the state tax deduction for contributions to the NC 529 Plan is set to disappear completely in 2014. Without the tax deduction, the North Carolina 529 Plan moves from being a great option for state residents to simply being an ok alternative.
The same underlying Vanguard-sponsored investment options found in the North Carolina plan can be accessed in other plans, sometimes with lower program administrative fees. Additionally, some states might have more attractive “glide paths” for age-based options, which start out more aggressive for younger plan beneficiaries but become more conservative as college age approaches. For better or worse, the Utah 529 plan now allows investors to create their own glide paths for age-based investment options. And some states have significantly broadened their investment menu to include funds from companies such as Dimensional Fund Advisors, whose funds we use consistently in our own client portfolios.
We will be conducting internal research to figure out which state presents the best option for our clients starting in 2014. For the time being, state residents should still consider the North Carolina plan due to the availability of the tax deduction this year. And current plan participants should hesitate before rolling over their plan assets into that of another state, as doing so would result in having to repay any previously claimed tax deductions.
If you have questions about your current 529 Plan, or if you just have a general question about saving for college, please reach out to us by visiting the Woodward Financial Advisors website or writing a question on our Contact Us page.