529 - Taxes vs Expense Ratio

Have a question about your personal investments? No matter how simple or complex, you can ask it here.

529 - Taxes vs Expense Ratio

Postby LusciousChunks » Mon Jan 28, 2013 3:05 pm

Hi,

I'm new to the forum and this is my first post. I am ready to open a 529 Plan for my one-year-old daughter, and I am considering the Maryland 529 Plan and the NY 529 Plan. The MD 529 is managed by T. Rowe Price and the NY Plan is managed by Vanguard. Everything else being equal, the major considerations for my decision are:

1. For similar age-based portfolios the expense ratios are 0.86% for MD, and 0.17% for NY
2. Since I am a MD resident, I can deduct $2,500 from my MD state income (my wife works, but is not subject to MD state income tax)

Last year (2011 taxes) my MD taxable net income was ~$70K. Based on my math, the savings from the MD tax benefit would not be as great as the overall costs of the plan over time. So does it make any sense to open a MD 529 or should I just go with the NY plan?

Thanks in advance for the help,

LC
LusciousChunks
 
Posts: 4
Joined: Mon Jan 28, 2013 2:33 pm

Re: 529 - Taxes vs Expense Ratio

Postby kenyan » Mon Jan 28, 2013 4:36 pm

Found this with a quick google search -

"Question - If I rollover a Maryland 529 account to another state's 529 program, does the state of Maryland recapture any of the state tax deductions I've received in the past?

Response from the College Savings Plans of Maryland - Currently they do not. There may be a recapture provision in the event of a refund, but not if the funds are rolled over to another states 529 plan."

http://www.collegesavingsmd.org/post-a-question.aspx

You might be able to get the best of both worlds. Contribute to the MD plan, get the tax benefit, then roll into a better plan.
Retirement investing is a marathon.
User avatar
kenyan
 
Posts: 2356
Joined: Thu Jan 13, 2011 1:16 am

Re: 529 - Taxes vs Expense Ratio

Postby LusciousChunks » Mon Jan 28, 2013 5:30 pm

kenyan,

Thanks for the quick reply. I did see that on the MD 529 website.

In order to make that strategy worthwhile, wouldn't I have to rollover funds contributed to my MD 529 each year into a different state's (NY) plan? This would require a bit more effort on my part each year. The tax break amounts to about $125 right now, so I guess some would argue that it is worth it.

Perhaps there is merit to opening a 529 in both states, with the first $2,500 going to MD, and the rest going to NY - but then I am right back with my original dilemma/question: is it worth the tax break worth chasing if it is less than the expenses over time.

LC
LusciousChunks
 
Posts: 4
Joined: Mon Jan 28, 2013 2:33 pm

Re: 529 - Taxes vs Expense Ratio

Postby kenyan » Mon Jan 28, 2013 7:01 pm

If you roll it over even infrequently, the expenses wouldn't be more than the tax savings.

0.69% * $2500 = $17.25 IF you hold it for the entire year. Even if you hold it for 2 full years between each rollover, you're paying perhaps $40 that second year (assuming some growth) in order to save $125 in taxes. You could leave the MD account open with a small amount in it to avoid the hassle of re-opening it every year or two.

I'm just going on theory here and cursory glances; I haven't looked into every detail. It does seem that you could easily save at least $100 per year on your state taxes, (net of the additional expenses) though.
Retirement investing is a marathon.
User avatar
kenyan
 
Posts: 2356
Joined: Thu Jan 13, 2011 1:16 am

Re: 529 - Taxes vs Expense Ratio

Postby Russell » Tue Jan 29, 2013 1:33 pm

Hi LC --

I'm planning to go the other way. I have opened 529 plans outside of Maryland for my nephews -- and was planning to transfer them into Maryland when they get closer to college age in order to pick up the MD state tax deduction.

My current understanding is that Maryland would count the entire rollover contribution from those out-of-state accounts -- earnings and all -- as being eligible for the state tax deduction. So the tax benefits could end up even better down the road....

Best,
Russell
The best material model for a cat is another, or preferably the same, cat. - A. Rosenblueth and N. Wiener (1945).
User avatar
Russell
 
Posts: 285
Joined: Fri Feb 23, 2007 3:26 pm
Location: on the Chesapeake Bay

Re: 529 - Taxes vs Expense Ratio

Postby Iorek » Tue Apr 02, 2013 3:10 pm

Russell wrote:Hi LC --

I'm planning to go the other way. I have opened 529 plans outside of Maryland for my nephews -- and was planning to transfer them into Maryland when they get closer to college age in order to pick up the MD state tax deduction.

My current understanding is that Maryland would count the entire rollover contribution from those out-of-state accounts -- earnings and all -- as being eligible for the state tax deduction. So the tax benefits could end up even better down the road....

Best,
Russell


Even if that is right, I think the tax break would be limited to $2500 per year (with the possibility of a carryforward for up to 10 years).
Iorek
 
Posts: 602
Joined: Fri Mar 08, 2013 10:38 am

Re: 529 - Taxes vs Expense Ratio

Postby gwrvmd » Tue Apr 02, 2013 4:57 pm

LC Usually the low expense ratio, which is usually Vanguard, is the correct move. Remember the state tax deduction is only on the money you put in; for your 1 yr old daughter there is going to be at least 17 years of expense ratios. Good investment options and a low ER is far more inportant than a one year, relatively insignificant one year state income tax deduction.
Most Bogleheads who have been around the track a few times use Nevada, Utah or NY. All Vanguard, good options and low ER. The plan Vanguard sells as "Its Own" is actually the Nevada Plan. I have 6 grandchildren in the Nevada plan which is not where I live nor where they live....Gordon
Disciple of John Neff
gwrvmd
 
Posts: 344
Joined: Wed Dec 02, 2009 9:34 pm
Location: Calabash NC


Return to Investing - Help with Personal Investments

Who is online

Users browsing this forum: Bing [Bot], grabiner, sdsailing and 55 guests