Decision on Reallocating Kids 529s

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Decision on Reallocating Kids 529s

Post by Scorpion » Thu Apr 20, 2017 2:33 pm

So I have 529 funds for my kids located in two states' plans: Wisconsin (where we reside) and West Virginia (to take advantage of DFA funds availability, which seemed like a good idea in 2006 or so). We have been depositing only in WI for a number of years now (taking advantage of tax deduction), but West Virginia still has the majority of funds. Kids are now teenager and pre-teen, so I thought it might be a good idea to evaluate investment options, especially since they have been in about 90% equity.

It seems that there are two decisions:
1. What should the kids' asset allocations be?
2. Should I move the WV funds to WI?

Some facts:
1. WV fees are much higher. 0.67% + $25 a year for privilege of investing in DFA funds. WI fees are 0.22% for a comparable plan (TIAA-CREF index funds). I have not investigated DFA funds in over 10 years, so I don't really know if they are "worth it" or not. I have always been a 100% index fund investor with value/small tilt. My instinct is that DFA is not really worth the extra fees.

2. The Age-based asset allocation options for kids are way more conservative than I am used to for personal investing, of course. The "normal" age-based option is 70% bonds for a 15 year old, with 85% by the time they are 18+. The "aggressive" age-based option is 55% bonds for a 15 year old, with 70% by the time they are 18+. Any thoughts on which way to go here? Normally the aggressive option would be a no-brainer for me, but maybe the answer is different when you are really planning to spend up all these funds, rather than building a nest egg.

3. We would theoretically have the ability to supplement their 529 funds with our own funds by the time college gets here, but I really like to think of these funds as my kids' funds, with them taking the losses or getting the benefits of the asset allocation. Of course, I don't think it would be correct to ask the kids (even the older one) their opinion on the allocation, since they would not be equipped to make the decision.

4. I am about 70/30 in my personal asset allocation, to the extent that is relevant.

5. If we contribute at our normal rates, and relatives do the same, through the end of their college years, the current 529 balances plus future contributions pay for about 90% of the four year cost of the best state school in Wisconsin, assuming no investment growth in the accounts from this date and no college cost inflation from this date (hopefully investment growth could at least equal college cost inflation, but of course no guarantees). That would seem to argue to at least switch to an age-based AA option, rather than the 90/10 allocation I have been going with all these years.

I appreciate your thoughts!

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Re: Decision on Reallocating Kids 529s

Post by Rupert » Thu Apr 20, 2017 2:53 pm

I would be no more aggressive than 50/50 or 40/60 at this stage. Your normal asset allocation is not relevant given the short time horizon you're working with here. As for whether to switch to your own state's fund, what does Wisconsin do re taxing distributions from 529s? My state exempts 529 distributions from state income taxes only if the distributions are made from my state's own 529 plan, i.e., they tax distributions from out-of-state 529s. That would answer the question for me. I actually have my 529s in another state's plan right now but will roll them over into my state's plan before taking distributions. (The higher fees in my state's plan relative to the other state's plan justify this inconvenience in my opinion, notwithstanding the small state tax deduction I'm passing up now). Does the availability of DFA funds in WV justify keeping those plans? Nope.

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Re: Decision on Reallocating Kids 529s

Post by remomnyc » Thu Apr 20, 2017 3:19 pm

We have our 529s in a Vanguard aggressive age-based portfolio, which we are comfortable with. Below is the sequence.
ages 11-15: 50% stock/50% bond
ages 16-18: 25% stock/75% bond
ages 19+: 75% bonds/25% short-term reserves

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