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Does a 529 plan even make sense given the fees?

Posted: Tue Sep 04, 2018 11:44 pm
by LeanHogs
I was reading a bunch of old posts and other sites online discussing 529 plans, and I can't figure out if it's something I should make use of or not. I regularly fill up all the other tax-advantaged space that I'm aware of (401k, IRA, HSA), so the choice for me is between a 529 and a taxable account.

I don't have kids yet so the time horizon would most likely be at least 20 years and possibly longer. But in my reading I saw that 529 plans apparently have an additional plan fee on top of the ERs of the individual funds it invests in, which a taxable account doesn't have. Doesn't this mean that as the time horizon gets longer, it's less and less worth it to fund a 529, since the plan fee will have more time to compound relative to what you'd get from a taxable account?

Re: Does a 529 plan even make sense given the fees?

Posted: Tue Sep 04, 2018 11:48 pm
by KyleAAA
Most state 529 plans have fairly low costs these days.I think it’s very unlikely a taxable account would beat your average 529 plan, especially since many of them come with state tax deductions.

Re: Does a 529 plan even make sense given the fees?

Posted: Tue Sep 04, 2018 11:53 pm
by HEDGEFUNDIE
CA ScholarShare is probably the cheapest

0.11% - 0.17% all-in fees for the passive age based portfolio

https://www.scholarshare529.com/research/fees.shtml

Re: Does a 529 plan even make sense given the fees?

Posted: Tue Sep 04, 2018 11:58 pm
by runner3081
Ohio plan user here. No fees for the account, Vanguard funds available.

Re: Does a 529 plan even make sense given the fees?

Posted: Wed Sep 05, 2018 12:17 am
by JakeyLee
KyleAAA wrote:
Tue Sep 04, 2018 11:48 pm
Most state 529 plans have fairly low costs these days.I think it’s very unlikely a taxable account would beat your average 529 plan, especially since many of them come with state tax deductions.
This is the winning answer. However, A great rule of thumb I've learned here... No need to start such an event/investment until you've got kid(s) on the way. It's like saving up for a paint job on a '68 Dodge van. But you haven't bought the van yet. Relax. Find the van first. There's tons of time. In the mean time, you keep investing. If you fall short in the hypothetical world of needing a custom paint job for that van.. Wizards and unicorns and metal flake... At least you were putting money aside in other categories. Yeah.. Enjoy that van. Whether you find it or not... And don't forget the waterbed .

Re: Does a 529 plan even make sense given the fees?

Posted: Wed Sep 05, 2018 12:44 am
by NoHeat
The phrase “don’t count your chickens before they hatch” comes to mind, when considering opening a 529 before having a child.

If a college-bound child never materializes, the 529-owner will give up 10% of earnings when withdrawing funds for a “non-qualified” purpose, and while that’s not a horrible penalty, it’s enough to keep anyone from purposely starting a 529 fund as a retirement investment, if they could just invest in a taxable retirement account instead.

Stating that differently, in the context of your question: the value of the tax-free compounding, while real, is not as great to an investor as a ten-percent bonus. If it were worth more than ten percent after let’s say two decades, you would hear of everyone doing it for retirement purposes, but they don’t.

The fees are not that much nowadays, on a good 529 plan. Twenty years ago I had to look hard for decent fees, but now really good fees are easy to find. A fee of 0.1% compounded over 20 years is 2%. I’m pretty sure the extra value of tax-free compounding is more than 2%, even if it’s less than 10%.