Using 529 Plans for College Funding – Part 2 Real world case study

March 27, 2015  |  

Using 529 Plans for College Funding – Part 2 Real world case study

Key Takeaways

  • When it comes to 529 plans for our clients, we recommend those that meet our firm’s overall philosophy about investments—and costs.
  • The earlier you start saving the better. If you wait until your child is say, 10 years old, you would need to sock away $14,000 a year to have $150,000 on hand by the time your child is age 18.
  • Here’s the good news. Contributors may earn state income tax deductions on contributions to a 529 plan, depending on what state you reside in.

In Part 1   of this post we offered a brief introduction to 529 plans, discussed the differences between contributory and prepaid 529 plans, and highlighted the advantages and disadvantages of the more widely used contributory 529 plan. Here, we’ll review our process for recommending 529 plans to our clients and show how costs can make a huge difference in your long-term savings.

For an example, let’s take Jane and Michael Smith.  Here is their situation:

  • The Smiths have a nearly 10 year-old daughter, but have not started saving for her college yet.
  • Their household income is $150,000 per year.  Based on their budget, they plan on contributing $14,000 each year until their daughter is 18.
  • They live in Pennsylvania, where Jane and Michael can each receive a state tax deduction for contributing up to $14,000 ($28,000 total) to any 529 in the country.
  • Based on projected future education costs, they want to have at least $150,000 in the 529 plan by the time their daughter reaches 18.

As advisor to the Smith’s, we’ll take a systematic approach to recommending a 529 plan that best meets their needs. Here is what we’ll consider:

1. Investments

The first thing we do is determine which investments each 529 plan offers.  We always want to recommend investments that meet our firm’s overall investment philosophy. You can learn more about our philosophy at our Evidence Based Investing site.  There are a number of plans with investment options that match our approach, so we tend to gravitate to those plans.

2. Fees

From that preferred list, we’ll want to understand the fees charged for each plan.  Most 529’s have multiple layers of fees.  All plans have administrative fees, and some have additional ones.  For example, fees can be charged to receive paper (rather than electronic) statements, when contributions are made randomly (rather than regular transfers), when accounts have lower than minimum balances, etc.  In addition, the underlying investments in all plans have their own fees.  We are fanatical about keeping fees as low as possible for our clients, so we’ll consider overall cost very strongly.

3. Taxes

Last, we’ll consider which tax benefits are available at the state level.  All 529 plans and states are different, so when comparing plans, we want to ensure that we’re accounting properly for how these deductions play into the overall savings and account accumulation picture.


Back to the Smith’s. Let’s say we’ve narrowed the list of plans that best fit their needs to either the Pennsylvania 529 plan or the Utah 529 plan.  Keep in mind that the recommendation could be very different for your particular situation. Please call us to perform this analysis for you.  Here are some of the factors we considered to make these two recommendations:

  • As Pennsylvania residents, the Smith’s receive a tax deduction for any 529 plan to which they contribute. Therefore both plans are equal from a tax deduction perspective.
  • Pennsylvania and Utah both offer Vanguard investments, but Utah also offers investments from Dimensional Fund Advisors (DFA).  Both Vanguard and DFA are fund families that we view favorably.
  • When it comes to fees, here is where we start to see the real separation.  Check the chart below for a comparison of fees and ending account balances using the Smith’s timeline and a conservative 5 percent annual investment return:


Cost data provided by
Assumes $14,000 contributions at beginning of each year, 9 total contributions
Assumes 5 percent growth rate
  • Considering the fees and the affect fees have on growth, as well as the net effect of the state tax deduction they’ll receive, the Smith’s net cash flow would be over $3,500 more (as shown in the chart below) by using the Utah state plan instead of the Pennsylvania state plan.  Fees really do make a difference!


If you would like us to do a 529 analysis for you, or you’d like to discuss college funding options, please feel free to email me or call the office at (800) 588-1732


About Patrick Runyen

As a Wealth Manager at Independence Advisors, Patrick Runyen, CPA/PFS, CFP® works closely with clients to implement wealth management solutions. He leverages his technical financial planning and consulting experience to assist clients with investment counseling, retirement planning, estate planning, wealth enhancement, asset protection, tax planning, and other personally significant financial decisions. CLICK HERE TO ASK PAT.
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