[My monthly column at Physician Money Digest discusses the recent changes to the Utah Educational Savings Plan. I admit I'm a little biased, but I thought it was the best plan in the country BEFORE the recent changes. Now there are even more options, including 6 DFA funds and 6 new Vanguard funds, and even lower expenses. I also include a guide for how to decide which 529 to use for your given state.]
One of the best ways to save for college is a 529 plan.
Like a Roth IRA, an investor contributes up to $14,000 per year in after-tax money to the plan and the money grows and is withdrawn tax-free, as long as it is spent on approved educational expenses.
The Utah Educational Savings Plan (UESP), the 529 savings plan for the state of Utah, is a perennial favorite among investors. Over the years it has shown exceptional management, quality customer service, low and ever-decreasing costs, excellent investing options and a decent tax break for in-state residents.
Non-resident investors, especially those whose home state 529 programs don’t offer a significant state tax break, routinely flock to Utah’s plan to save for college. The UESP just announced several new changes to the plan that make it even better.
3 Changes to Utah's 529 Plan that Make it Even Better
#1 Lower administrative fees
The UESP had been charging an administrative asset fee of 0.15% to 0.20%. This fee has been reduced an average of 10% to between 0.14% and 0.18% for almost all of its investment options, although it remains at 0.20% for one of the most popular options, the customized static option.
UESP also charges a maintenance fee of $3 per $1,000 invested up to a maximum of $15 per account per year. This fee is unchanged, but easily can be avoided if you’re willing to receive your quarterly statements online (or if you are a Utah resident).
While these slightly lower fees won’t make a huge difference in the long run, it does show the commitment of the UESP folks to passing its savings on to you.
#2 Two new static investment options
The Utah plan offers four age-based asset allocation models (aggressive growth, growth, moderate and conservative) that become less aggressive as the child approached the college years. UESP also offers six static asset allocation models (All-equity 30% international, all-equity 10% international, S&P 500, 100% bonds, a bank savings account and the Utah Public Treasurer’s Investment Fund.)
UESP is now adding two more static options: one is 70% equity and the other is 20% equity. The plan will continue to offer the two customizable options, one age-based and one static, where investors who like to be in direct control of their investments can choose exactly what they want to invest in.
#3 New funds
UESP is also adding a total of 12 new funds to the plan, all from passive investing giants Vanguard and Dimensional Fund Advisors (DFA). The Vanguard funds include Value Index, Growth Index, Small Cap Value Index, Small Cap Growth Index, Emerging Markets Index, and Short-term Bond Index Funds. The DFA funds include the Global Equity, US Large Cap Value, US Small Cap Value, Real Estate Securities, International Value and One-Year Fixed Income Portfolios.
The addition of the DFA funds is particularly exciting for do-it-yourself investors, who are generally denied access to these excellent funds unless they’re willing to hire a financial advisor. One of the best funds from DFA, the passively-managed US Small Cap Value Fund, has outperformed its closest competitor, the index-hugging Vanguard Small Cap Value Index Fund, by nearly 1% a year for the last decade.
The Vanguard fund is no slouch either, having outperformed 64% of its peers over the last 10 years, but the DFA fund has outperformed 86% of all small cap value funds.
The addition of a real estate fund is also a welcome addition since the UESP did not previously have one. Not all DFA funds have outperformed their Vanguard counterparts, but investors now get to choose from a menu of funds from the best two mutual fund providers inside the lowest cost plan in the country.
Utah residents also get a 5% tax credit on annual contributions up to $1,840 ($3,680 if married) per child. As a Utah resident with three children, contributing $11,040 to the UESP lowers my tax bill by $552 per year.
How to choose a 529 plan
Some investors are unclear about how to choose a 529 plan for college savings. The choice for many investors, however, is really quite obvious, as shown in the following chart.
If you live in Utah, you should use the UESP. You should also use the UESP if you live in a no-income-tax state, a state that doesn’t offer a 529 tax break or a tax parity state. This means residents of 21 states should be exclusively using the Utah 529 plan.
Those in other states — especially those where the entire contribution is deductible or where excess contributions can be carried forward indefinitely — should use their own state plans. However, you may consider rolling those funds over to the UESP at a later date. While 529 plans allow you to do this once a year, there may be fees involved and some states charge a recapture tax when you roll money out of their state 529.
Other options
If you are not obtaining a state tax break, you plan to save less than $2,000 per year per child, and you have an income under $110,000 ($220,000 married), then you might also consider using a Coverdell Educational Savings Account. Low cost options are available directly through mutual fund providers such as Vanguard, without the admittedly low UESP administrative fees. However, the income and contribution limitations will cause most doctors to choose a 529 plan instead.
There are other 529s that are almost as good as the UESP. Some of the better ones include those from Nevada, Ohio, New York, Illinois, Wisconsin, California and Michigan. As these plans continue to improve in order to compete for investor dollars, we should continue to see lower costs and improved investment options as the years go by.
WCI: Could you help me compare the “agressive growth” USAA 529 plan to the same in Utah?
I am a Texas resident so I get no benefits from the 529. I currently have the 529 for my son and will start one for my daughter after she is born next month.
I use USAA for the majority of my banking needs.
Beau, you can find out more at savingforcollege.com, but here’s the “Total Asset-Based Expense Ratio” for the two plans:
USAA: 0.65% – 1.05% + $15 annual maintenance fee
UESP: 0.160% – 0.224% (or 0.200% – 0.615% for the Static Investment Options) + $15 annual maintenance fee
Source: http://www.savingforcollege.com/529_plan_details/?page=plan_details&plan_id=92 and http://www.savingforcollege.com/529_plan_details/index.php?page=plan_details&plan_id=52
Beau-
As you know, I also use USAA for a lot of stuff, including several types of insurance, banking, and a home equity loan/mortgage for my investment property. Their investing side isn’t too bad, but it doesn’t compare to a place like Vanguard (or UESP) for that matter. Their 529, however, has one unique feature that makes it very interesting, a matching grant program.
Here’s their plan document:
https://content.usaa.com/mcontent/static_assets/Media/529_Plan_Description.pdf?cacheid=3973337886_p
In order to get the match, you have to be in the military and either a Nevada resident or stationed in Nevada. Your or your spouse must have earned a Purple Heart. The beneficiary must be a child or spouse. If you qualify for all these things, USAA will match up to a total of $1500 of contributions to the 529. It’s isn’t much, and few will be eligible for it, but if you are, it’s $1500 free. You can always put any 529 contributions above and beyond $1500 in the Utah plan.
Aside from that, it’s a good program, but not as good as Utah’s. They’re invested in USAA funds, which aren’t as good as Vanguard and DFA fund and are more expensive. As a Texas resident, I see little reason for you to use USAA’s 529 over the UESP, aside from a bit of a convenience factor.
Appreciate the response. I checked out the saving for college site. Pretty useful. Next month when Emma is born I am going to switch both the kids over to the Utah plan.
I am a little confused how to setup a 529 csp with your state. I currently use USAA 529 plan but learning about the cost behind and types of funds usaa uses I prefer to use a different. Is it possible to remove my establish 529 usaa and place it into another 529
Yes, you can do a 529 to 529 transfer.
A reason a resident of PA may want to contribute to the PA plan that may be overlooked — value of PA 529 is excluded from PA Inheritance Tax, not other states’ plans. So in the case of someone putting large amounts into a plan, it can make a big difference. I had a grandparent put $100K into each grandchild’s PA account, which was not taxable for PA Inheritance Tax (which would be 4.5 percent for lineal descendents if invested in Utah or any other state’s plan.)
Inheritance tax is imposed upon death, so if said grandparent bequeathed money in their will to their grandchildren’s 529 plan, but lived past their grandchildren’s formal education years, how would this help?
Thanks for sharing that great point Mary. I was unaware of that. I suspect there may be a few other state-specific 529 provisions out there I am unaware of (it’s tough to keep track of 50 plans.) Keep in mind you could probably always invest in Utah’s (or someone else’s) 529, then roll it over to Pennsylvania’s at a later age.
A couple of other considerations about Pennsylvania is that the tax for transfer to lineal descendants is only 4.5%, so it is quite low. It’s also interesting that there is no exemption for this inheritance tax, so it’s paid on the entire estate (except for some exempt farming real estate and on the amount inherited by the spouse.)
How about the NY direct plan (nysaves.com)? It basically has Vanguard funds, and ERs are a teeny bit lower than UESP.
The New York plan is also very good, especially for New York residents. They charge 0.17% overall (close enough to the UESP not to matter, although it was 0.25% until a year ago) plus ERs of 0.03% to 0.11% on Vanguard institutional index funds, which are actually a little lower than the UESP. They also have a much bigger state tax deduction for NY residents ($10K for a married couple instead of ~$3500 for the Utah) plan. The main advantage of the Utah plan over the NY plan is more investment options, especially now with the DFA funds. If I were a New York resident I probably would just use the NY plan, even if I were investing more than $10K a year. But if I were neither in Utah or NY, I would still choose the Utah plan.
Thanks for your reply. I agree that the Utah plan has more options. I’ve already started with the NY plan so I’ll stick to it. One additional comment – the 0.17% includes all management fees as far as I can tell. Vanguard ERs are also included in that one fee.
http://www.savingforcollege.com/529_plan_details/?page=plan_details&plan_id=37
Looking back at it, it looks like you’re right. (See page 13 of this: https://a248.e.akamai.net/f/248/21630/7d/im.uprinv.com/rc/sr2/ny/programDescription.pdf) It’s a little confusing on their website as they’ve still got the old fee schedule on line in certain places.
I love seeing these 529 plans competing with each other, driving down prices and improving the product for all of us. Perhaps the 401K system could be reformed by implementing state 401ks like state 529s.
Great article and summary for everyone to know which plan to use based on their state of residence.
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WCI,
Presumably you use either the customized age-based or customized static options. Would you share what your allocations are? I’m setting up an account and I’m trying to decide how I’m going to set up my customized option.
50% TSM and 50% TISM. I may add some SV now via the DFA funds. I prefer to take a lot of risk with these relatively small 529 accounts.
https://www.whitecoatinvestor.com/3-reasons-why-you-can-take-more-risk-with-a-529/
WCI,
What do you think of this customized portfolio for Utah’s 529 using DFA funds??
http://servowealth.com/resources/articles/529-plans-just-got-lot-better
Thanks,
Tony
I know this is an old post, but when it comes to 529 plans, it seems to make sense to contribute up to the limit which your state provides a tax deduction. Then if you wish to contribute more, should I put the money into Utah’s plan to save on expenses?
Thanks!
Hi james,
I was tipped onto your website by a friend and have become an addict. I am currently trying to convert my IRAs to 401k’s so I can start the backdoor ira.
MY question to you is regarding 529. I live in NY State. Can I still do the Utah plan even if there is little to no chance my kids will go to school there? Is that the best option for me? Any help is appreciated. Thanks
Kamal
New York’s plan is also pretty good. I’d probably stick with that, at least up to the limit where you get a state tax break, and perhaps beyond that, just to keep it simple.
I have a 529 through Upromise (Utah) for my children that I funded for the first 5 years of their lives. After my divorce, the court ordered that the funds go to them for college or personal use after age 26 if they don’t go to college.
Can I open another 529 in Utah for them (I want to be able to control what occurs with money including giving to grandchildren depending on if they get scholarships or don’t go to college) or would it be better to just continue funding their current accounts?
Yes, you should be able to open another one for them which you can control. Are you sure it’s a Utah 529 your upromise account is linked to? I didn’t think you could do Upromise with Utah’s plan.
You’re right. Its a Nevada 529.
there 2 options in the NY plans which one do I go with?
You mean do you use the “advisor guided” plans where you pay more or the “direct plans” where you pay less? I guess I’d probably go with the direct plan and then if you need advice seek that out separately.
Random question about 529s. I would like to start thinking about contributing to a 529 but don’t have children yet. My understanding is that a 529 for someone in the family (for example child A) can be used for someone else as long as they are in the same family (child B) in the event that child A doesn’t go to an extensive school. If I understand it correctly, I can use it as one big pot of “family” money that can be allocated to whoever I want. Along those lines…
1) Can I put money in my name or my wife’s name now (with the intention of never using it for us) and that would go towards my kids tuition in 20-25yrs? When they are subsequently born, I could then start contributing directly to their accounts?
2) Even when my child is born, could I contribute to multiple 529s under various family members (me, wife, my parents, etc…) as well as my child, all with the intention of it going towards child A?
Yes and yes. Be sure to read the rules of the specific 529 you use. There are lots of loopholes there for someone willing to change beneficiaries frequently. Keep in mind one downside of using “one big pot” is that you only get one state tax deduction/credit (assuming you get one at all) rather than multiple ones. So the beneficial way to do it is open multiple 529s for different beneficiaries, get the tax break, then combine them by changing beneficiaries.
Thank you so much for all your help and guidance. You are certainly much appreciated. I was wondering which of the UESP investment plans you would suggest for a 5 year old and a 8 months old. Aggressive vs. moderate, age based vs. static.
I’m very aggressive with my 529s, as I blogged here:
https://www.whitecoatinvestor.com/3-reasons-why-you-can-take-more-risk-with-a-529/
My 529s are 100% stock, 50% TISM, 25% DFA SV, and 25% VG SV.
Thanks for the 529 articles, your book and the website. I looked at the chart in your “best 529 plan” article and found your suggestion for using my state’s plan in Mississippi versus the Utah plan and I have a question about an option that I am not sure you considered. MS has higher exp ratios than Utah at 0.64 total minimum ER for the Mississippi plan. Note that you can do a rollover to another state’s plan every 12 months. Also note, that the disclosure for the MS plan indicates, “Outgoing rollovers that are free from federal income tax are also free from Mississippi income tax.” It seems to me that I could make monthly contributions in MS, claim my tax deduction for a 5% profit, then transfer everything in the account to the Utah plan EVERY 12 months. So, I pay the Mississippi high fees on only one year’s contributions/earnings every year rather than paying those fees on the accumulated account value over say 17 years. I actually do better than paying Mississippi’s higher fees on only one years’contributions/earnings because my contributions are made monthly rather than the entire amount being there for an entire year. Am I missing something?
Hey All,
Live in NJ and just had a baby girl and looking to open an age based 529. Have most investments with Fidelity and they now offer a fairly low cost 529 option in either Arizone, Mass, New Hampshire, DE and all have an index based age fund with ER around .24-.29. Or I can go with Ny or UTAH, but may be less convenient than having all in one place at Fidelity. Not sure if worth it. What do you guys think. FYI planning to auto-invest monthly. Thanks in advance
My 529s are 100% stock, 50% TISM, 25% DFA SV, and 25% VG SV –
I am new to this, but believe in 100% stock portfolio!
Appreciate you clarifying your underlying funds –
1. I get TISM is “VG Institutional Total Stock Market Index Fund”
2. What’s DFA SV?
3. What’s VG SV?
Thx!!
I do 100% stocks in my 529s, but not my retirement portfolio for reasons discussed here:
https://www.whitecoatinvestor.com/3-reasons-why-you-can-take-more-risk-with-a-529/
DFA small value and Vanguard small value. They’re funds in the UESP.
Great. Thanks for your response!
Hi WCI,
Im new to your website and love it. I live in california and based on your recommendations I am considering the UESP in Utah versus the 529 in california. In your blog you mentioned the UESP is better now because of lower costs. Comparing the two above plans, it seems like the 529 in california has a lower administrative costs. Is it the costs of the underlying investments that gives UESP a lower overall cost?
Also I was on another website that recommended the UESP but only the vanguard age-based portfolios. Could you comment on this? It does not seem most people on this blog follow this recommendation. What would you recommend for someone with no knowledge of investing?
The age based portfolios are fine if you don’t want to design your own.
Here’s a link to the California 529 fee page: https://www.scholarshare.com/invest/fees-and-expenses.shtml
Looks like the fees are very low, perhaps even lower than Utah’s. Remember, 529s are a moving target (so things have changed since I wrote this article). If you’re happy with what you see in the California plan (good investment options and low costs), then use that.
Actually looking at the fees again, it seems like calfornia has lower fees overall compared to the UESP. If this is the case, are there other reasons that make the UESP better?
WCI,
I have recently happened upon your blog, and am finally catching up on my financial education thanks to you.
Living in WI, we have the minimum amount required to meet state deduction benefits in WI 529, and 50% of the rest split between MD, and Vanguard 529.
Could you comment on Vanguard 529 please? I am planning to roll the MD 529 to Vanguard versus Utah.
Thanks
GoldieM
I think they’re both great. The differences are pretty minimal. I agree with your plan to get the max tax break out of WI, then put the rest into either Vanguard/Nevada or Utah.
One advantage of the Utah plan is the DFA funds, one of which I’m using. Expenses are about the same. It is nice to NOT have another investing company, so in that respect, the Vanguard plan might be nice. Get you to Voyager/Flagship faster etc. But can’t go wrong either way.
Could you take out my moniker and use my pseudonym please? It does ask for a last name, I just don’t wish to publish it.
Thanks!
Done. Bear in mind you can put anything you want into that box.
Could you please comment on the feasibility of withdrawing the money without penalty if the beneficiary is awarded a merit based scholarship? My review suggests that an equivalent amount of the scholarship that the beneficiary receives annually can be withdrawn penalty-free.
Thanks!
Penalty-free but not tax-free. Probably better to roll it into a 529 for the next kid or a grandkid.
Thanks for your prompt responses even on a weekend. I have been reviewing all your posts on 529s and realize that you have indeed reviewed them multiple times and answered most of my questions already. I appreciate your patience!
I am very interested in the Private 529 option as well. I especially like your suggestion to wait about 3 years before graduation to roll over to of those funds. We have an almost 15 year old who would like to go to MIT or Caltech, so I think I will research more before any hasty roll over.
Thanks again!
What’s a weekend? I’m an emergency doc, remember?
Aren’t only the earnings taxed at the marginal rate both federally and by the state? Aren’t the contributions withdrawable tax free in such a situation. This would be akin to interest from a bank savings account rather than earnings from stocks and bonds.
Of course. Only the earnings are taxable on a federal basis. Hope you kept good records to prove your basis, of course! My Utah 529 basis has been a bit of a pain to establish since I came there from an ESA originally. It’s not right for at least one of my kids. Hope it won’t matter. Read your state laws as far as whether any of your original deduction is now recapturable.
I’m trying to decide between a 529 from my home state of IL versus Utah or Nevada. If I opt with Illinois I get the tax break as a resident; however, Nevada and Utah both seem to have pretty good plans and better fees. Can you give some advice or perspective?
At least fund the Illinois plan up to the tax break. You can then put any additional money you want to save into the UT or NV plan if you don’t like the IL plan or if it is too expensive.
Can you comment on any likelihood of using the 529s if my children choose to study abroad, such as in Cambridge UK or India? I can assume that I can defer the use of the funds for a postgraduate course or for a grand child, of course.
Thanks
Cambridge is eligible for 529 money. You can look up other institutions here: http://www.savingforcollege.com/eligible_institutions/