[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a Roth IRA, an investor contributes up to $14,000 per year in after-tax money to the plan and the money grows and is withdrawn tax-free, as long as it is spent on approved educational expenses.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.
Hello,
I’m fairly new to 529s. I have a one year daughter and I want to start her college savings now. I currently live in GA and I’m prior service and use USAA for many things. So the USAA 529 plan sounds appealing. After doing some research I came across the Utah 529 plan and I hear is one of the best. do you have any suggestions on which plan to choose? Again I’m new and trying to take it all in and make the right decision for my little one. Thanks!
Utah over USAA every time. USAA is great for banking and insurance (at least the service, not always the price.) But with investing, Vanguard is generally the default choice. With 529s, you first go with your state plan if you get a tax benefit there, otherwise go with a good plan like Utah, Nevada, New York etc.
I have been reading your blog and I am looking for ways to save for college for my newborn. After reading your article, It looks like a 529 through Utah would be the best plan for me as I live in California. However I also saw your comments that you thought that the Vanguard 529 is also a good choice.
Which one do you think is better to do: Vanguard 529 or Utah 529?
I like Utah’s but differences are very minor. The “Vanguard” one is Nevada’s. Both have Vanguard funds and low expenses.
I have a one yr old and a nine year old and I live in Alaska. Until this point I had CDs for my kids. I’m not an expert at investing and prefer to stick with a ‘canned’ program but have done a lot of research and it looks like either Utah or NY age-based Vanguard direct funds may be the best for us. Questions; 1. UT (direct) seems to get a little better reviews compared to NY (direct) but NY got a better “savingsforcollege” 5-cap rating, and has better returns (age-based) short and long term than UT, plus NY fees seem lower than UT. Is there something I am missing and why UT seems to get more thumbs up than NY? 2. For both girls if I went with UT I was thinking Aggressive Domestic age-based and for NY I was thinking Aggressive Growth age-based for both children (1 and 9yrs). Thoughts? Thank you!
I think you’re choosing between the best of the best and you can’t go wrong with any of your choices. If you like NY a little better, go for it. Keep in mind these plans make slight changes every year, so one that was slightly worse one year might be slightly better the next.
Thank you.
Hi WCI
I would like your advice on my situation. I contributed to our Washington State pre paid college plan for my kid. In this plan you buy units now and then when the kid goes to college, you get a pay out which is tied to the cost of tuition at University of Washington. Like all prepaid plans the assumption was that college costs in the future would go up. However last year our state passed legislation which will decrease the cost of tuition about 15% in the next 2 years. Additionally according to the legislation future increases in tuition may increase by no more than state’s average annual growth rate in median hourly wage.
we bought the units at a price of $151 however the current payout value for each unit is $117.
my little one is 4 years old.
given these changes the state is allowing us to request refunds or to rollover into a different 529 plan without penalty
I have about $86000 in the plan.
my questions are
1) which 529 plan would you recommend between Nevada vs Utah. ( I already have an account with Nevada 529 with a much smaller balance of $5000. I chose Nevada at that time because of my other accounts with vanguard. my Nevada plan has been negative to even in terms of returns (aggressive age based portfolio). I was thinking about maybe directing this rollover into Utah’s 529 to not have all my eggs in one basket so to speak .
2) my 2nd question is regarding the timing of the investment. Do you think I should invest all this money at once when I roll over the money? OR invest smaller amounts over the next 6m to 1 year by initially keeping the money in a money market?
Thanks a lot
Interesting risk for using a pre-paid plan. Sorry that happened to you.
1) Both are fine. Seriously. You’re choosing between two totally awesome plans which are always counted in the top 5 plans in the country and both are continually getting better. I use Utah’s because I like having both Vanguard and DFA funds, but I’m totally biased because I get a 5% state tax credit for using it. Nevada’s is great because it has Vanguard funds and can be seen when you log in to look at your other Vanguard accounts. One is probably slightly cheaper than the other, but I couldn’t tell you which it is without looking up the details and I’m confident the overall costs are quite similar.
2) I’m a big fan of lump summing. It is the right answer most, but not all, of the time and you can only tell in retrospect. DCA is a psychological crutch unless you have a crystal ball.
https://www.whitecoatinvestor.com/dollar-cost-averaging-is-for-wimps/
I lump sum everything I can afford to lump sum and those lumps are getting bigger as the years go by. My HSA, Roth IRAs, and 529 money all goes in every year the first week of January. When I have the money, I invest it.
Thank you for posting about Washington State and the pre-paid plan. I am moving there from Nebraska to start residency in June and want to start saving for my daughter who is 10 months now.
PAULBH30, In early 2018, WA state is planning to start a regular 529 plan in addition to the prepaid Tuition Credits plan. I am from WA state as well and welcome to the state.
Hey thanks! I cant imagine that 529 plan will be better than Utah’s, or at best, match it. It will be interesting to see if the Tuition Credits plan will be worth it too, especially since the last one collapsed.
I was wondering why you used DFAs in your 529? Maybe they had different expense ratios at the time but DFA are significantly higher than Vanguard rates and have similar yields. Especially for the Domestic Equity options.
Two reasons. One, I wanted to try it out and it has a higher small and value loading than the equivalent Vanguard fund. Two, the UESP won’t let you put more than 25% into either small value fund. So to put 50% into SV, I had to use both.
Interesting. I have been reading up about tilting and loading.
Thank you for your response and many more thanks for the book/website and overall information about this topic!
Hello,
First of all wanted to say thank you keep doing what you are doing. It makes a real difference in lives of physicians.
I’m looking at 529 plans and narrowed down to Illinois New York or Utah
-I’m from pa and get tax break regardless of in state or out of state 529?
– Illinois offers a 0.12% expense ratio with aggressive index investing a good split between 3 vanguard funds total stock/ international/reit)is there a benefit to Utah plan over this ?
– if I choose to do private education can I do 10000 a year on top of college savings and just withdrawa the 10000 and leave whatever additional college savings in the account to let it grow ( I hope that even if 10000 stays in 529 a year it will give some yield tax free)does this make financial sense?
The Illinois plan sounds fine. Utah is a perennial front runner with Vanguard and DFA funds and a long history of good management. Either is likely fine for you.
Yes, you can use it to pay for private K-12 now and whatever isn’t used can go toward college. Not sure there will be a ton of benefit to you there to just move it through the 529. You’re likely getting the maximum state benefit with just the college savings and the only other benefit is the tax-free growth.
what do you guys think about Arkansas GIFT plan 529 ? There is 10K state tax deduction with MFJ. However, I am looking at the expense ratio of 0.57. The comparison with Utah and Nevada is below.
https://vanguard.wealthmsi.com/comp529main.php?vang1=NV2&planid1=AR1&planid2=UT1
Is it worth the tax break?
Sure, I’d use it up to the amount you get a deduction for. You may be able to roll that over immediately to Utah, Nevada, New York etc too, but double check whether that deduction is recaptured in your state.
What do you think about age-based plans that invest aggressively initially and taper off? Do you think this is smart or unnecessary to lower the risks once they get older? I am in Alabama, and they actually have a lot of good Vanguard funds!! Still have a lot to learn. Thanks.
https://www.collegecounts529.com/investment-options/age-based/
They’re fine. Nice automated solution. If you don’t want to get less aggressive, you certainly don’t have to. But whether that’s a good idea or not requires a working crystal ball, which I don’t have. If stocks do great, you would want to stay aggressive. If there is a big bear, you may be glad to have not been so aggressive.
Hi I am new to this and feeling overwhelmed with all the considerations. Any thoughts on WV vs Utah 529 plans?
Do you live in WV?