DC 529 Plan vs other states'

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CrownVic
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DC 529 Plan vs other states'

Post by CrownVic » Wed Aug 09, 2017 11:35 am

I'm a recent post-undergraduate, having been in the workforce for a year at this point. I'm considering going to business school within the next 10 years, probably sooner. I noticed that progressively more people have been saving for business/grad school with 529 plans. I live in DC but am planning to go to school in a different state, and probably leave DC for work reasons within a few years, before I would enroll in business school. Does anyone know how the DC 529 plan compares to other states' plans generally? As an aside, I'm considering relocating to California, New York, or Massachusetts.

RainStreet
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Re: DC 529 Plan vs other states'

Post by RainStreet » Wed Aug 09, 2017 1:01 pm

I've just started looking into the DC 529 myself for my young daughter. I believe it compares pretty favorably, though I'd welcome more perspectives. The 529 plan recently changed administrators (within the last year or so, I believe) and the new investing options are much more user-friendly than the old plan, with much lower expenses and fees. The fees aren't the lowest around, but the target date-style portfolios are all at 0.36% or lower, and of course you do get the DC tax deduction of up to $4,000 for an individual or $8,000 for a married couple filing jointly. With DC's high taxes-- 7% on taxable income between $40,001 and $60,000; 8.5% on income between $60,001 and $350,000; etc.-- that's not insignificant. And of course, you'd be free to use the funds at out-of-state institutions.

TBillT
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Re: DC 529 Plan vs other states'

Post by TBillT » Wed Aug 09, 2017 1:13 pm

There are some good experts here, but the main reason for sticking with the DC plan is the probably tax deduction. I belong to Virginia 529 for the same reason. If that was not a big benefit, then you'd be free to pick a generic plan such as Vanguard that might be best overall, not considering the tax deduction.

PS- in your case, planning to move, not sure DC plan is in your long term interest. Usually you have to give any tax deduction back if you transfer out later.

CrownVic
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Re: DC 529 Plan vs other states'

Post by CrownVic » Thu Aug 10, 2017 7:40 pm

TBillT wrote:main reason for sticking with the DC plan is the probably tax deduction.

PS- in your case, planning to move, not sure DC plan is in your long term interest. Usually you have to give any tax deduction back if you transfer out later.
Since the tax deduction is an attractive feature, would it potentially be advantageous to open a plan in the state I decide to go to school in and then live in as well, but start it while I'm still in DC? Would I be able to deduct once I move to that state and work prior to attending school?

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grabiner
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Re: DC 529 Plan vs other states'

Post by grabiner » Thu Aug 10, 2017 8:45 pm

CrownVic wrote:
TBillT wrote:main reason for sticking with the DC plan is the probably tax deduction.

PS- in your case, planning to move, not sure DC plan is in your long term interest. Usually you have to give any tax deduction back if you transfer out later.
Since the tax deduction is an attractive feature, would it potentially be advantageous to open a plan in the state I decide to go to school in and then live in as well, but start it while I'm still in DC? Would I be able to deduct once I move to that state and work prior to attending school?
State tax deductions for a 529 plan are given on contributions; all 529 plans are free from state tax on the investments, and on the withdrawals if used for college. Therefore, if you contribute to a 529 plan, the only state tax benefit available is from the state you live in now.

Check the recapture rules; some states will tax the amount you deducted if you move the money out of the state plan into another state's plan. If there is a tax recapture, high-cost 529 plans from your state may not be worthwhile, as you lose more to expenses than you pay in taxes. If there is no recapture, you can contribute to your own state's plan for the tax deduction, and later move the money to a low-cost plan in another state. DC taxes rollovers to another plan within two years.

But I don't know of any state which recaptures the tax if you leave the money in that state's plan, and then spend it on college when you are no longer a resident.
David Grabiner

TBillT
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Re: DC 529 Plan vs other states'

Post by TBillT » Fri Aug 11, 2017 11:04 am

CrownVic wrote:
TBillT wrote:main reason for sticking with the DC plan is the probably tax deduction.

PS- in your case, planning to move, not sure DC plan is in your long term interest. Usually you have to give any tax deduction back if you transfer out later.
Since the tax deduction is an attractive feature, would it potentially be advantageous to open a plan in the state I decide to go to school in and then live in as well, but start it while I'm still in DC? Would I be able to deduct once I move to that state and work prior to attending school?
Basically you are getting started a bit early before you know where you might settle. I would think something like Vanguard might be good for now. I am wondering if you get the state tax deduction if you later transfer the funds to the state program (not too many states have the deduction...sounds like DC is copying off of Virginia's plan to be regionally competitive). The only reason I went with Virginia plan is they have the tax deduction and also they have a lot of Vanguard funds, so I figured I could live with it.

I am a grampa now so this all new stuff. I regret they did not have 529's when I was saving. I did have a small Clifford Trust which was how we used to have do what 529 plans now accomplish.

CrownVic
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Re: DC 529 Plan vs other states'

Post by CrownVic » Fri Aug 11, 2017 12:06 pm

TBillT wrote:
CrownVic wrote:
TBillT wrote:main reason for sticking with the DC plan is the probably tax deduction.

PS- in your case, planning to move, not sure DC plan is in your long term interest. Usually you have to give any tax deduction back if you transfer out later.
Since the tax deduction is an attractive feature, would it potentially be advantageous to open a plan in the state I decide to go to school in and then live in as well, but start it while I'm still in DC? Would I be able to deduct once I move to that state and work prior to attending school?
Basically you are getting started a bit early before you know where you might settle. I would think something like Vanguard might be good for now. I am wondering if you get the state tax deduction if you later transfer the funds to the state program.
I must confess that I'm a little confused on the overall concept: is it possible to open a 539 plan not affiliated through a state directly, such as through Vanguard, and maybe that way not get access to a state tax deduction until I transfer it into a state's affiliated program (if that's possible)? Or are state programs the only account type?

TBillT
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Re: DC 529 Plan vs other states'

Post by TBillT » Sat Aug 12, 2017 12:10 am

CrownVic wrote:
TBillT wrote:
CrownVic wrote:
TBillT wrote:main reason for sticking with the DC plan is the probably tax deduction.

PS- in your case, planning to move, not sure DC plan is in your long term interest. Usually you have to give any tax deduction back if you transfer out later.
Since the tax deduction is an attractive feature, would it potentially be advantageous to open a plan in the state I decide to go to school in and then live in as well, but start it while I'm still in DC? Would I be able to deduct once I move to that state and work prior to attending school?
Basically you are getting started a bit early before you know where you might settle. I would think something like Vanguard might be good for now. I am wondering if you get the state tax deduction if you later transfer the funds to the state program.
I must confess that I'm a little confused on the overall concept: is it possible to open a 539 plan not affiliated through a state directly, such as through Vanguard, and maybe that way not get access to a state tax deduction until I transfer it into a state's affiliated program (if that's possible)? Or are state programs the only account type?
You can do either state sponsored 529 or generic such as Vanguard. And you can transfer funds from one to another.
The main attraction of the state sponsored is any side benefits such tax deductions.

3feetpete
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Re: DC 529 Plan vs other states'

Post by 3feetpete » Sat Aug 12, 2017 6:05 pm

This is off topic from OP's post but my understanding is that a DC resident is entitled to in state rates at any state. I got this from a UNC undergraduate student from DC. I don't know if this is applicable to graduate students but if that is the case it may be a good reason to maintain DC residence.

Scotttheking
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Re: DC 529 Plan vs other states'

Post by Scotttheking » Sun Aug 13, 2017 7:05 am

Simplified.
...
Since you are living in D.C., open D.C. 529 plan.
Once you move, open a 529 plan in new location if you get a tax benefit, otherwise find lowest cost plan offered.
For simplicity, roll D.C. 529 into new plan if cost are lower.
When going to school, use any and all 529 funds to pay for it, state of fund and school are irrelevant. 529 funds apply to any accredited school.

CrownVic
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Re: DC 529 Plan vs other states'

Post by CrownVic » Mon Aug 14, 2017 9:51 am

3feetpete wrote:
Sat Aug 12, 2017 6:05 pm
my understanding is that a DC resident is entitled to in state rates at any state
I've only been living here for a year but I have heard that said, although I'm not sure whether it is true but I'll be sure to follow up as that would be very advantageous if I go to a state school

CrownVic
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Re: DC 529 Plan vs other states'

Post by CrownVic » Mon Aug 14, 2017 9:57 am

Scotttheking wrote:
Sun Aug 13, 2017 7:05 am
Simplified.
...
Since you are living in D.C., open D.C. 529 plan.
Once you move, open a 529 plan in new location if you get a tax benefit, otherwise find lowest cost plan offered.
For simplicity, roll D.C. 529 into new plan if cost are lower.
When going to school, use any and all 529 funds to pay for it, state of fund and school are irrelevant. 529 funds apply to any accredited school.
We might have a winner!. This is what I needed to hear. This makes the most amount of sense I think. However, theoretically if I somehow do not find a lower cost plan after I move, naturally I assume I'm still allowed to contribute to the plan (but give up the tax benefit) since it's irrelevant where the fund and school is?

CrownVic
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Re: DC 529 Plan vs other states'

Post by CrownVic » Mon Aug 14, 2017 10:39 am

CrownVic wrote:
Mon Aug 14, 2017 9:51 am
3feetpete wrote:
Sat Aug 12, 2017 6:05 pm
my understanding is that a DC resident is entitled to in state rates at any state
I've only been living here for a year but I have heard that said, although I'm not sure whether it is true but I'll be sure to follow up as that would be very advantageous if I go to a state school
So after some research the criteria says that it's specifically for undergrad and people under 26. In terms of the money, it actually gives students up to $10,000 annually for the difference between in-state and out-of-state public schools. On top of that, it's not for every single state school, just participating schools, but the list is very extensive. For private schools, it limits aid to $2,500 annually for private schools only in the DC metro area.

masteraleph
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Re: DC 529 Plan vs other states'

Post by masteraleph » Mon Aug 14, 2017 11:04 am

CrownVic wrote:
Mon Aug 14, 2017 9:57 am


We might have a winner!. This is what I needed to hear. This makes the most amount of sense I think. However, theoretically if I somehow do not find a lower cost plan after I move, naturally I assume I'm still allowed to contribute to the plan (but give up the tax benefit) since it's irrelevant where the fund and school is?
One caveat:

Don't roll over the DC 529 within two years of opening the plan, since they'll recapture the tax deduction in that case (that's DC's recapture provision). Otherwise, you should be ok.

Every state plan has their own quirks. NY, for example, has a flat 0.16% fee (no ERs outside of that), allows a $5000 individual/$10000 MFJ deduction for residents, but recaptures all of those deductions AND charges you income tax on the earnings if you ever roll the money over to a different state's 529.

AnonJohn
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Re: DC 529 Plan vs other states'

Post by AnonJohn » Mon Aug 14, 2017 11:34 am

CrownVic wrote:
Mon Aug 14, 2017 10:39 am
CrownVic wrote:
Mon Aug 14, 2017 9:51 am
3feetpete wrote:
Sat Aug 12, 2017 6:05 pm
my understanding is that a DC resident is entitled to in state rates at any state
...

So after some research the criteria says that it's specifically for undergrad and people under 26. In terms of the money, it actually gives students up to $10,000 annually for the difference between in-state and out-of-state public schools. On top of that, it's not for every single state school, just participating schools, but the list is very extensive. For private schools, it limits aid to $2,500 annually for private schools only in the DC metro area.
I think this option is not as good as it seems. It's contingent on DC gov't funding [the family income cap is quite high, but that could change]. But generally, state support for public universities has fallen quite a bit over the last decade. They've made up for that by raising tuition, especially on out of state. So I don't think the $10K means as much as it once did. Concretely: University of Virginia (as an example) charges $15.7K instate tuition and fees and $45K out of state. Maryland is $10k in state and $32k out of state. $10k is only 30% of the difference. It varies a lot though. And $40k is a lot of money. I'd just as soon DC partnered with (say) MD and VA to come up with some sort of regional reciprocity program (like NE Regional Student Program or Southern Region Common Market, or Midwest Student Exchange, etc)

@Rainstreet - thanks for flagging that they left Calvert Investments. I'd ruled out the option a few years ago. I knew the Council was looking at it, but not that anything had happened.

TBillT
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Re: DC 529 Plan vs other states'

Post by TBillT » Mon Aug 14, 2017 9:11 pm

masteraleph wrote:
Mon Aug 14, 2017 11:04 am
CrownVic wrote:
Mon Aug 14, 2017 9:57 am


We might have a winner!. This is what I needed to hear. This makes the most amount of sense I think. However, theoretically if I somehow do not find a lower cost plan after I move, naturally I assume I'm still allowed to contribute to the plan (but give up the tax benefit) since it's irrelevant where the fund and school is?
One caveat:

Don't roll over the DC 529 within two years of opening the plan, since they'll recapture the tax deduction in that case (that's DC's recapture provision). Otherwise, you should be ok.

Every state plan has their own quirks. NY, for example, has a flat 0.16% fee (no ERs outside of that), allows a $5000 individual/$10000 MFJ deduction for residents, but recaptures all of those deductions AND charges you income tax on the earnings if you ever roll the money over to a different state's 529.
That's quite a good deal if it only takes 2 years to get out of the DC tax recapture provision. I am thinking here in Va. they claw back much further, but I need to check.

Nearly A Moose
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Re: DC 529 Plan vs other states'

Post by Nearly A Moose » Mon Aug 14, 2017 10:37 pm

DC resident here. The plan to find the DC 529 and then roll out of it once you pass the recapture period is probably your best play. DC income taxes are high. But be aware the tax break is capped, I beloved to a $4,000 deduction per person (I know it's capped at $8,000 for a couple, each with a separate account funded to $4k, and I think it's a $4k per person cap to the deduction). But thats almost $400 or $800 for a couple of you're at the highest marginal rate, so nothing to sneeze at. We ran the comparison between funding the DC 529 and taking the tax break versus using Utah's and decided the tax break was worth it for us. And that was with the older Calvert funds, before the improvement earlier this year. I only am invested in their equivalent of total stock market, but the ER strikes me as good enough for a 529.

I'd go the 529 route before a taxable account, at least up to the limit of the tax deduction. If you end up not needing it, you can redesignate the beneficiary as your kid if/when you have one, and worse case you can pull the money out without too much of a penalty. Of course, things change if you're not able to save for retirement, I think we're all assuming you have that under control.

Edit to add: also, you're allowed to have multiple 529s open. So if you open one in DC and move, you can just open a new one in your next state and let the DC account sit until spent or you pass the recapture period.
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

CrownVic
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Re: DC 529 Plan vs other states'

Post by CrownVic » Wed Aug 16, 2017 11:48 am

Thank you all so much for the responses. Taking this into consideration, I think that in my case DC's 529 plan will be the best route to go since I'm almost positive that I will still be here in 2 years time. It's a shame the $10k isn't available to graduate students, but I'll just have to make do without it.

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