I’ve written a lot about opening a 529 plan this year because Jordan and I are expecting our first child (or, depending on when I publish this, our first child might already be here. Weird.)
Though I laid out the basics of a 529 plan in this video and post, the question still remained: what 529 plan should I choose? I wanted to share what we chose, why, and how much we’re contributing. Not because we’ve done this 100% right, but because we’ve gone through a process we’re really comfortable with. And, transparency, you know?
After spending too long debating the pros and cons of a few different plans, we decided to go with the Nevada 529 through Vanguard. Here’s how we came to our decision:
Why We Chose Our 529
California doesn’t give a tax break
As I mentioned in this article and video, some states let you deduct contributions to a state 529 from your taxable income. This gives residents of a state an extra incentive to invest in a plan in that state. For example, if you live in New York and invest in a New York state 529 plan, you can deduct your contribution on your state income tax return.
We are currently living in London but we will likely move back to California, so I still consider it our home state. Since they don’t give that tax incentive, we were open to looking at 529 plans in other states.
Nevada is one of the highest rated plans
Morningstar publishes rankings of 529 plans each year and the Vanguard 529 for Nevada is consistently ranked as a top plan. This is based on different factors including fees and historical performance.
Low fees, a lot of options
We decided to go with an age-based option, which means that as our child gets older (and closer to college age), Vanguard automatically adjusts how the money is invested. When the child is young, the investments go into riskier stock funds. As they get older, it moves to less risky bond funds.
I like money, but I would hate to have to balance that risk myself over the next 18 years. I like having it done automatically for me. Within their age-based option, you can choose between conservative risk, moderate risk, and aggressive risk.
On top of that, the fees for the age-based option are incredibly low. The fee (expense ratio) for the 529 plan that we picked is 0.16%.
We know and trust Vanguard
Since Nevada uses Vanguard to manage their 529 and we already have investment accounts with Vanguard, it was an easy choice. We don’t have to open another account with a random financial institution and we already have all of our bank accounts connected. While ease shouldn’t be the primary driver of your choice, it was the icing on the cake for us. It took less than 10 minutes to set up and fund.
Also, I did call them to be sure I was setting things up correctly and to understand how to transfer the 529 to our child when he or she is born. Because I’m setting this up before our child is born, I’m technically the 529 beneficiary. As soon as he or she is born, we’ll be able to transfer these funds to a 529 plan in their name.
The customer service was fantastic and had I wanted her to, the customer service agent would have walked us through all of our investment options. It really couldn’t have been easier.
Wealthfront, another investing favorite of ours, also offers the ability to invest with them in a 529 plan. They use the Nevada 529 Vanguard plan as well. They do charge an advisory fee on top of the fee that Vanguard charges, so we opted to just go directly to the source (Vanguard) to invest. But if you use and love Wealthfront and want to keep all of your investments in one place, having a 529 with Wealthfront might be worth the extra cost to you.
The drawbacks weren’t enough to sway us
There were two drawbacks we saw when looking at the Nevada 529 Plan:
- We needed to start off with an initial investment of $3,000, whereas other plans, like CA, have minimum initial investments of $25
- The max amount that can be contributed to a 529 is $370k, compared to CA’s limit of $425k
We had a windfall from January that we used to fund the 529, so meeting the initial investment account wasn’t an issue. I also can’t imagine in any situation where we would contribute more than $370k to our child’s 529. I know college is expensive, but at some point, we just have to know our own limits.
Which brings me to…
How much we are contributing
This is 100% personal and I truly believe this is no right or wrong answer when deciding how much you should support your child’s education financially. You do you.
But I do want to share the questions we asked ourselves to figure out what was right for our situation. This comes with a caveat: our financial situation might change in the future. What we’ve decided to today will probably change as we continue to reassess priorities in our life.
Before we got into the numbers, we asked – and answered – these questions:
- Are we “on track” with our retirement and other financial plans? I really hate to talk about our Personal Capital dashboard all the time, but I turned to it here for some help. I was always using random calculators, spreadsheets, and my “gut feeling” to help us see if we were on track with our retirement goals and other goals (like a new house). Before we decided how much to put toward a 529 plan, we looked at the retirement calculator to make sure we were on-track with our money so far.
- What level of support do we feel comfortable providing? Jordan and I both went to UC Santa Barbara for undergrad (a public university) and then went to Duke for our MBA programs (a private university). I can completely see the merits in both private and public schools. We were also both very fortunate to have family support to pay for our undergrad education. As we looked at the different costs, we decided that we would aim to pay for an in-state public university. If our child wants to attend a private university, we may have a discussion when they’re in high school about whether or not we can help with additional funds, or if they’ll be expected to find scholarships and contribute themselves.
- How much do we want them to contribute? This is something fun that we talk about – a lot. Because our parents were so generous in paying for our college, I don’t know how much we understood about the costs. We’d both like our child to have a stake in the game and contribute to their education. We’re not 100% sure what that looks like now, but we fully have the expectation that they will need to contribute something financially.
- Do we still feel like college is the best use of money? This is a tough one that we don’t have an answer for. College is expensive. And college isn’t right for everyone. Will college be right for our kid? Who knows. Will a college degree still be worth it in the future? I have no idea. We tried our best to answer these questions now, but we’ll continue to reassess in the future.
Once we talked about all of this, we got right down to business. We (again) used Personal Capital’s education estimate tool because we wanted to see how much we needed to save and how much paying for a college education would disrupt our other plans for our money.
We were able to input how much we opened the account with, which university we were saving for (we chose to estimate using the costs of sending our child to a school through the University of California system), and then how much we wanted to contribute monthly.
It came back and told us that we’d be a little short and we should kick up our contributions just a little if we wanted to fund it 100%.
College is EXPENSIVE.
You do not have to use Personal Capital to figure this out – savingforcollege.com also has a calculator, though it’s less thorough than what we used with Personal Capital. We already use Personal Capital’s free tool, so we kept it going.
How We Estimate & Track Our Plan
We were able to connect our current 529 account to Personal Capital so we can get more accurate estimates of whether we’re on or off track.
Using their education tool takes a few minutes to figure out, so I shortcut that process for you with the video. If you just want to see how we use the education planner within Personal Capital, you can see it in this video clip here.
As I mentioned, the Personal Capital tool originally showed us slightly off track with our savings goals for college. Rather than saving $400 per month, like we have planned, it suggests that we save $450 per month.
If we don’t start contributing the extra $50 a month now, we’ll be short $14,600 by the time our child starts college. That’s a bummer, but it’s good to know now and not be surprised when our kid is 18 and applying to schools.
The tool also shows that we’re going to save over $18,000 by putting our money in a 529 plan, rather than saving through a regular investment account.
I really like that I’ve been able to link our 529 account with Personal Capital so that when I check in on our money monthly, I’m able to see whether we’re on or off track with our savings goal. It sees the contributions that we’re making to the 529 and is a nice check to see that we’re working toward our goal.
The other thing that I really like about using this is I’m able to put in a school and get an estimate of what the cost will be for that university.
California is a big state with a wide range of public school options. While the average public school is $23k per year, a school in the University of California system is $38k per year. That’s a huge difference and it’s nice to get that estimate broken down.
I’m sure this will become even more helpful as our child gets older and we begin to know what their school preferences might be.
There are pros and cons to using Personal Capital’s free tools and it’s not right for everyone. I break down a tutorial as well as my review in this post. If you don’t already use their tools, I’d give this a quick read before deciding whether it’s right for you.
Ultimately, we are really comfortable with our choice for a 529 plan. We feel completely knowledgeable about the process, how it works, and what we need to be aware of as we save for education.
(note: that is an affiliate link, but it’s a free tool I use and love and really wanted to share. For more information on affiliate links, see this disclaimer.)
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