The Sun's Financial Diary » 529 plan

Switching to Virginia Education Savings Trust (VEST) Plan

Sun — Tue, 23 Feb 2010 14:27:51 +0000

When I opened the 529 college savings plan for our first daughter in 2005, the plan offered by New Jersey was never an option to me because there is not tax benefit for using NJ 529 plan even for the state residents. But that wasn’t all. What really made me stay away from NJ college savings plan, called New Jersey Best College Savings Plan that is managed by Franklin Templeton, was the poor performance of the plan and high cost of investing with plan. In fact, Morningstar has rated the plan as one of the worst 529 plans for years. Eventually, I went with two plans that also offer extra incentives: UPromise 529 Plan and Fidelity UNIQUE Plan. Both are tied to credit cards that I use often, the Bank of America UPromise Card (1% cash back) and Fidelity 529 College Rewards Card (2% cash back), so I can turn cash back earned from using the cards into savings for college. While it’s nice to have that extra money invested without much effort since I use the credit card for almost every purchase anyway, I have to admit now that the choice wasn’t the best that I could have made back then. Therefore, when it was time to get another 529 account for the younger one, I did my research more thoroughly and settled with Ohio CollegeAdvantage 529 Plan. So far, I am very happy with the Ohio plan, not only because the plan’s low cost and wide selection of funds, but also the periodic referral bonus offers, which has provided a huge boost to the account’s growth last year.

All the above investment decisions were made when we were living in New Jersey.

Now that we have settled in Virginia, it’s time to make some adjustments to our 529 plans. Unlike the state of New Jersey, Virginia offers a better option for saving for college and tax incentive for using the state sponsored program. Currently, Virginia has four college savings plans: Virginia Prepaid Education Program (VPEP), Virginia Education Savings Trust (VEST), CollegeAmerica and CollegeWealth. The plan I chose is the Virginia Education Savings Trust (VEST) because

It’s a direct-sold college savings plan that is open for enrollment all year long;
It offers a wide selection of low-cost investments, including stocks (domestic and international), bonds, TIPS, and REIT;
It was selected as one of the best 529 plans by Morningstar;
We can deduct up to $4,000 per year per account in Virginia income tax.

VEST Investment Portfolios

The tax benefit alone isn’t enough for me to make the switch. Fortunately, that’s not only benefit the VEST plan offers. The main advantage of the plan, in my opinion, is its investment choices. VEST plan has two types of porfolios: Age-based evolving portfolios and non-evolving portfolios.

The age-based evolving portfolios consist a total of nine portfolios: Eastern Shore, Alleghany, Chesapeake, Potomac, Southside, Blue Ridge, and Piedmont. With the age-based portfolios, as we know, the asset allocations, mainly between stock and fixed income, of each portfolio evolves as the beneficiary’s age approaches the age for college. It works a lot similar to the way that life-cycle funds work. For age-based evolving portfolios, the underlying investments include large-cap, small-cap/mid-cap domestic equity funds, foreign equity funds and fixed income funds, managed by Vanguard, Templeton, Capital Research and Management, INVESCO, etc.

On the other hand, non-evolving portfolios include ten portfolios: Aggressive Portfolio, Moderate Portfolio, Conservative Portfolio, Money Market Portfolio, Total Stock Market Index Portfolio, Total Bond Market Index Portfolio, Total International Stock Index Portfolio, Inflation-Protected Securities Portfolio, REIT Index Portfolio, and Socially Targeted Investment Portfolio, all but the last one are made of Vanguard index funds.

After examining both types of portfolios, I decided to use funds in the non-evolving portfolios category to build my own portfolio in order to, I hope, boost the growth of the portfolio when our kids are both more than 10 years away from college. The four funds I chose are: Vanguard Total Stock Market Index Fund (50%), Vanguard Total International Stock Index Fund (33%), Vanguard REIT Index Fund (8%) and Vanguard Total Bond Market Index Fund (9%). Right now, the portfolio invests heavily in stocks as you can see from the above asset allocations. Going forward, I will have to the adjust the allocation of the portfolio myself as the portfolio is not evolving “automatically”. It’s an additional job that I will need to do myself, but it gives me the flexibility I want in building the portfolio. Will this be a good strategy or a bad one? Only time will tell

VEST Costs

When selecting an investment, whether it’s a regular investment such as a mutual fund, or an investment for college like the 529 plan, cost is always a top concern to me. Since most of VEST’s underlying funds are low-cost Vanguard index funds, the overall cost of investing in VEST plan is rather low. For example, the total annual fees for age-based portfolio range from 0.35% (Piedmont Portfolio) to 0.53% (Eastern Shore Portfolio). For non-evolving portfolios, the Socially Targeted Portfolio has the highest cost at 1.0%%. All other Vanguard funds are quite cheap, with costs from 0.30% (Total Stock Market Index Fund) to 0.52% (Total International Stock Index Fund).

In addition, VEST plan also charges an one-time application fee of $25 for each new account. Other fees include

Account cancellation: $25
Change of beneficiary: $10
Rollover to another QTP: $25
Change of account owner: $10
Non-sufficient funds: $25
Expedited distribution: $50

Overall, it seems that investing with VEST plan costs a little bit more than doing so with the Ohio CollegeAdvantage plan, especially for age-based portfolio, and Ohio plan doesn’t charge account setup as the VA plan does. However, both plans are rather cheap to own and both offer great investment choices. What makes the VA plan even sweeter is the $4,000 per account annual Virginia tax deduction. It will make that little additional cost worth it.

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Switching to Virginia Education Savings Trust (VEST) Plan

Saving for College? Consider the Coverdell

David Dierking — Wed, 13 Jan 2010 14:33:01 +0000

The name “529” has become synonymous with college saving since the account was created back in 2001. It’s become so synonymous that many people will likely assume that the 529 is the only account out there geared specifically towards saving for college. Not only is it not the only college savings account out there it might not even be the best option out there.

The Coverdell Education Savings account began its life as the Education IRA account before getting named after the late U.S. Senator Paul Coverdell who was its primary advocate. The account provides for tax-free savings for education just like the 529 but with some important differences as well.

Here, I compare and contrast the two accounts and which I think might be a better deal.

Contribution Limits

The biggest difference in the two account types is how much you can put into them. How much you can put into a 529 account depends on the state that the account is opened under but in general the contribution limits range from about $100,000 to as much as $350,000 per beneficiary. That means for the average American there’s essentially no limit.

With the Coverdell, you are limited to a $2,000 annual contribution from all sources. Additionally, you must meet IRS income limit requirements in order to contribute to the account at all.

Advantage: 529 – With greater contribution limits and no income restrictions, the 529 offers much more flexibility.

Uses For Plan Assets

529 plans allow for tax-free withdrawals for college expenses only.

Coverdell accounts allow you to save for qualified expenses from elementary school all the way through to college. This is particularly advantageous to someone who has children in private school and is looking for additional tax savings.

Advantage: Coverdell – Being able to save for elementary, high school or college tuition gives the Coverdell account the edge.

Income Limits

Generally speaking, just about anyone can contribute to a 529 account. There is no income limit restriction on individuals who contribute to the 529 account so the wealthy can take advantage of these accounts just like everybody else.

With the Coverdell, you must fall beneath the IRS income limit of $95,000 for single filers and $190,000 for joint filers in order to contribute. Those limits won’t affect most of us but the wealthy will be left out in the cold here.

Advantage: 529 – Again, the 529 offers more flexibility with its greater availability.

Investment Options

With 529s, each state provides a menu of choices. Some options are run by the state itself and some are offered through registered investment advisory firms like Fidelity and TIAA-CREF. In each case though, you are limited to the investment choices offered by the state.

Coverdells work similarly to IRAs in that you can choose any investment you’d like for your account – stocks, bonds, mutual funds, CDs, etc. The only caveat is that the investment firm needs to offer the Coverdell account in order for you to invest (Fidelity, for example, does not offer the Coverdell).

Advantage: Coverdell – 529s draw some criticism for their limited options and the Coverdell allows you a much broader range of choices.

State Tax Deduction

Depending on the plan and state of residency, your contributions into a 529 plan account could earn you a state tax deduction.

No such deduction exists for contributions into a Coverdell account.

Advantage: 529 – The state tax deduction is a great bonus with the 529 account as long as you can get it.

Verdict

So which account type comes out ahead? The cop out answer is that it depends on your circumstances. If you’re looking for an option for saving for college, the 529 is likely your better option. The higher contribution limits, the potential state tax deduction, and its wide availability make it an excellent choice for investors.

However, if you have a youngster attending private school and are looking for some tax savings, try the Coverdell. The contribution limits are a drawback but since 529s don’t allow you to use funds for secondary school expenses, this account may be your best choice.

Both accounts can have a place in your portfolio and both have their advantages. Knowing all of your options will help you keep less of your money in Uncle Sam’s hands and more of it in yours.

Photo credit: DeaPeaJay

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Saving for College? Consider the Coverdell

Fidelity Reduces 529 Plan Costs

Sun — Thu, 03 Dec 2009 16:02:52 +0000

I am using Fidelity 529 plan to save for our older daughter’s future education. The investing started nearly four years ago and it’s still going every month now. When I read an article on Morningstar.com yesterday that Fidelity is reducing costs of its direct-sold 529 plans, I was quite happy to hear the news because, as a long-term investment plan that invests mostly in index funds, the cost of the plan is always high on the list of things to consider when selecting a plan. According to the Morningstar article, Fidelity

is slashing fees the most on its direct-sold 529 index portfolios in New Hampshire, Massachusetts, California, Arizona, and Delaware. Fidelity is reducing its program management fee to 15 basis points (0.15%), down from 30 basis points, and the total annual asset-based fees range from 25 – 35 basis points (down from an already reasonable 50 basis points).

The plan I am using is the New Hampshire UNIQUE plan 2024. I haven’t received any email or letter from Fidelity yet, so I don’t know details of exactly what has changed to my plan, but it looks like the total annual asset-based fee is now at 0.39% for the 2024 plan.

This isn’t the first time that Fidelity cut costs of the 529 plans it manages. In 2006, the UNIQUE plan eliminated the annual account fee. So the reduction in the fund’s total annual fee is definitely a welcome news.

BTW, in addition to my regular monthly purchase to the plan, I also make additional contributions by using the Fidelity 529 College Rewards Card which offers 2% cash back for every purchase. The credit card is linked to the plan, so every time the accumulated cash back reaches $50, the money is automatically invested in the 529 plan.

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Sweet! Now You Can Get $50 Bonus from CollegeAdvantage

Sun — Wed, 16 Sep 2009 15:14:18 +0000

Early this month, Ohio CollegeAdvantage 529 College Savings Plan announced a promotion which gives each new plan participant $25 bonus for just opening an account. Yesterday, I got an email from CollegeAdvantage with a sweetened deal: For a limited time, each new customer will get another $25 bonus on top of the existing $25 referral bonus for simply setting up a systematic savings program (SSP), such as electronic funds transfers (EFT) from a bank account or payroll deduction with their employer. That’s a total of $50 incentive to start saving for your child’s future education, if that’s what you plan to do

Here’s how you can get $50 bonus from CollegeAdvantage:

Follow the step in my previous post to open an account with reference code 2331122 before December 15, 2009;
Once the account is opened, set up a systematic saving program to invest in the plan automatically before January 31, 2010;
Receive the $25 bonus 90 days after the SSP begins.

Quite simple, right? In order to get the bonus, the following requirements have to be met as well:

A minimum of $25 must be deducted per month.
The EFT and payroll deduction must still be active at the 90-day mark.
For EFT only, a minimum of three EFT pulls must have occurred within the 90 days.
For payroll deduction only, at least one payroll check must be applied within the 90 days.

I have been using EFT to invest since I set up the plan more two year ago (I didn’t get any bonus back than). In my opinion, an automatic savings plan is all you need to put saving and investing ahead of spending.

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Sweet! Now You Can Get $50 Bonus from CollegeAdvantage

Ohio CollegeAdvantage 529 Plan $25 Referral Bonus

Sun — Thu, 19 Feb 2009 14:05:01 +0000

It’s alive again!

Ohio CollegeAdvantage 529 Savings Plan, the plan that was rated as one of the best college savings plans by Morningstar in 2007 which is also the one we’re using to save for our daughter’s future education, has reinstated the $25 referral program. The program was first launched last December and from what I can see, it was a success. If you missed the bonus last time, here’s your chance again to earn $25 to jump start your college savings. I still have some referrals left from last time, so if you follow the instruction below to open an CollegeAdvantage account with reference code 2331122, both you and me a $25 bonus.

Go to Ohio CollegeAdvantage and open an account;
During the application, use reference code 2331122 in order to receive the bonus;
Fund the account with at least $25 to qualify for the bonus;
Receive the bonus in 7 t0 10 business days;
Use the $25 bonus you just earned to start saving right away;
Refer your colleagues and friends to CollegeAdvantage plan and earn more bonuses (up to $500) and save more for college

If you prefer, you can also the Contact form to request a referral link, but using the above reference code is much easier and faster. The bonus offer will expire on May 31, 2009 December 31, 2009.

Update: The $25 referral bonus is back. You can follow the above instructions to open an account and get $50 bonus. Offer ends December 31, 2009.

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iShares 529 Plan: Save for College with ETFs

Sun — Thu, 20 Nov 2008 20:06:34 +0000

I have heard some time ago that exchange-traded funds (ETFs) will be available in 401(k) retirement accounts. Not sure whether plan participants can trade ETFs in their accounts already, but in general I think it’s a good news not only because it will gives investors more choices to save for their retirement, but also ETFs are usually cheaper than their mutual fund counterparts (most ETFs are passive, index-based funds, so the cost for managing the fund is low) that are the only choice for most plans. The down side of having ETFs available in retirement accounts is that, since you can trade ETFs at any time during market hours, it may encourage excessive trading in the accounts. In the long term that will hurt investors because trading ETFs involves commissions that are added to the overall cost. If I take payroll deductions and invest the money in ETFs every two weeks, then the costs would be too high. In that case, using ETFs to save for retirement doesn’t seem to be a good idea. If I can control the investment frequency, then I may consider trying it.

Then how about using ETFs in college savings plans such as 529 plans?

Since I can control how often and how much to make a contribution in a 529 plan, the total trading cost can be reduced (trade less with a larger amount each time). So maybe it won’t be a bad choice.

I recently noticed that Barclays Capital, the creator of iShares ETFs, has teamed up with UPromise to offer iShares 529 Plan, a college savings plan that invests in nothing but iShares ETFs. Currently, the plan uses the following iShares ETFs to build its 20 investment portfolios (PDF file):

iShares Russell 1000 Index Fund
iShares Russell 2000 Index Fund
iShares MSCI EAFE Index Fund
iShares MSCI Emerging Markets Index Fund
iShares Cohen & Steers Realty Majors Index Fund
iShares Lehman Aggregate Bond Fund
iShares Lehman TIPS Bond Fund
iShares Lehman 20+ Year Treasury Bond Fund
iShares Lehman Short Treasury Bond Fund
BGI Institutional Money Market Fund

Some of the portfolios are age based, with target year from 2009 to 2024, some are investment style based, such as aggressive, moderate, and conservative.

Of course, when choosing a 529 plan, the number one thing comes to my mind is the cost. How much do the investments cost? Is there any administrative fee? Any sale load? As far as the cost is concerned, the iShares 529 Plan seems to be quite competitive. For all of its 20 portfolios, the annual asset based fees range from 0.50% to 1.1%, with most of them in the middle of 0.60% (still higher than the Ohio CollegeAdvantage plan that I am using). In addition, the plan also charges $10 annual account maintenance fee.

While the plan seems to be nice, there’s one catch: the plan is only available through a financial advisor, even though the advisor doesn’t earn any commission.

From what I was told when I called them, the reason for having to go through an advisor is that since the plan invests in ETFs, which may be new to some people, the advisor is to help plan participants understand the product. And the advisor only signs the forms. That’s all they do, they don’t earn any commission or collect any fee. In addition, the CSR on the phone also said the $10 fee will be waived if the account has more than $20,000 in assets.

Will you be interested in this plan if you already have an advisor? Or you’d rather stay will traditional low-cost investment such as mutual funds?

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iShares 529 Plan: Save for College with ETFs

CollegeAdvantage $25 Referral Bonus

Sun — Fri, 24 Oct 2008 14:44:27 +0000

I opened a 529 college savings account for our second daughter last year four months after she was born. After some research, I decided to use Ohio CollegeAdvantage 529 Savings Plan because of the selections of investments (mostly Vanguard index funds) and the plan’s low cost. Since then I have been making contributions to the account every month as part of our effort to help our children prepare for their future higher education.

Anyway, if you want to save for your child’s education by opening a 529 plan and decide to go with CollegeAdvantage plan as I did, then for a limited time, you can earn $25 bonus from now to May 31, 2009 December 31, 2009 to jump start your savings. CollegeAdvantage is now running a promotion that gives $25 to every new account opened through a referral. If you are interested in getting a CollegeAdvantage account and receiving the bonus, then

Open a 529 savings account with Ohio CollegeAdvantage plan;
Use reference code 2331122 during the application and fund the new account with $25 or more before May 31, 2009 December 31, 2009 in order to receive the bonus;
Use the $25 bonus you just earned to start saving right away;
Refer your colleagues and friends to CollegeAdvantage plan and earn more bonuses and save more for college

Sounds great, right? Then get the free money before it’s gone! The bonus offer will end on May 31, 2009 December 31, 2009.

Update: The $25 referral bonus is back. You can follow the above instructions to open an account and get $25 bonus. Offer ends December 31, 2009.

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Are These Myths Preventing You from Saving for Children’s Higher Education?

Sun — Sun, 18 May 2008 19:51:19 +0000

We started to save for our daughter’s future education shortly after they were born (for our second daughter, we did wait nearly four months before opening a 529 plan for her ) and since then we have been making monthly contributions to their 529 accounts, currently5. Th at $14,77e reason for deciding to help our children is quite simple: We want them to go to the schools at their choices when the time comes without having to worry about how to pay for it themselves. I was lucky enough to finish my college tuition-free, but my parents did support me with all other expenses. Now, I want to do the same for our children. Somehow I feel it’s an obligation. With annual college inflation running twice as much as the general inflation, the cost of college education could become a heavy burden to them after their graduation if our children have to pay for their own education.

Though participation rate in 529 plan has increased exponentially in recent years, according to Investment Company Institute, not every parent has taken the full advantage of the vehicle to save for college because of misunderstandings of the plan. Last week, I received an email from Fidelity which points me to an article on college-saving myths, which clarifies some common misconceptions of 529 plans. The following are the excerpt of the article.

Myth 1: Saving in a 529 plan will affect my child’s eligibility to receive financial aid
Truth: Assets in a 529 plan are owned by parents, not the child. Though the assets are only assessed at 5% when determining federal financial aid, as opposed to 20% for child-owned assets.

Myth 2: I shouldn’t risk investing my money in a college savings account when the market is so volatile
Truth: Trying to time market is never a good idea to invest in stocks. Instead, making contributions regularly (dollar cost averaging) help to smooth the ups and downs in the short-term.

Myth 3 : I’ll lose control over the assets in a 529 plan if my child decides not to attend college
Truth: Parents can eaisly change beneficiary if the child doesn’t want to go to college. In the worst case scenario, the money in a 529 plan can be withdrawn for purposes other than higher eduction at a 10% penalty.

Myth 4: 529 plans offer limited investment options
Truth: Though 529 plans don’t have the flexibility to offer all the investment options available, many plans do provide a wide selection of investments such as bonds, index funds and age-based portfolios at low costs.

Myth 5: I don’t have enough money to open a 529 plan
Truth: There are many 529 plans require a minimum initial investment as low as $50 and monthly contribution of $15 with an automatic investment plan. You don’t have to have a lot of money open a 529 account.
Myth 6: I don’t want to limit my child’s college options by having to invest in my state-sponsored 529 plan
Truth: Anybody can invest in any 529 plan, not just those sponsored by the resident’s own state, though some plans do offer extra tax incentives to the state’s residents.

Myth 7: The contribution limits of 529 plans won’t allow me to save enough for college
Truth: Unlike IRA accounts ($5,000 limit for 2008) and 401(k) accounts ($15,500 limit for 2008), annual contribution limits of many 529 plans can be as high as $300,000.

Myth 8: You can get a better return on your investments if you create your own portfolio of funds versus savings in a 529 plan
Truth: Because of the 10% penalty, a dedicated college savings plan can prevent parents from withdrawing money from the account for day-to-day spendings that are not related to higher education.

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Are These Myths Preventing You from Saving for Children’s Higher Education?

Morningstar’s Best and Worst 529 College Savings Plans

Sun — Fri, 18 Apr 2008 14:18:10 +0000

Really, I almost got a heart attack when I saw Ohio CollegeAdvantage is among the worst college savings plans published by Morningstar yesterday because that’s the one I opened for our younger daughter last year. Fortunately, what I have isn’t exactly what’s named in the Morningstar list.

Anyway, Morningstar yesterday published its annual ranking of the best and worst college savings plans. Five plans are chosen as the best 529 plans because of their superiorities in fees, investment diversification, plan flexibility and fund choices compared to their peers.

llinois Bright Start College Savings Program (OppenheimerFunds): This plan charges 0.20% to 0.23% for index portfolios and 0.38% to 0.63% for actively managed portfolios and there’s a $10 annual fee for each index portfolio. It requires only $25 to start the plan and $15 minimum in subsequent investments. The plan is managed by OppenheimerFunds and Vanguard.
Maryland College Investment Plan (T. Rowe Price): This plan is also one of the best in last year’s ranking. It charges $25 account fee annually plus 0.28% program fee. The underlying funds’ expense ratio range from 0.40% to 0.69%. The minimum initial investment is also $25. For Maryland residents, up to $2,500 contribution can be deducted from state taxable income.
Virginia CollegeAmerica (American Funds): Another winner in the 2007 ranking, Virginia CollegeAmerica plan is a broker-sold college savings plan which offers 22 American funds. The plan charges $10 for opening an account as well as $10 annual account fee. The expense ratio of this plan ranges from 65% to 1.10%. Virginia residents who participate in this plan can deduct up to $2,000 ($4,000 beginning 2009) from state income.
Virginia Education Savings Trust (Virginia): VEST plan give investors a large selection of index funds and actively managed funds in age-based portfolios. Plan managers include Vanguard, Templeton, and American Funds. The plan charge $25 when an account is opened plus $10 annual fee. Expenses of underlying funds are between 0.06% and 0.32%. $2,000 contribution to the plan can be deducted annually for Virginia residents.
Colorado Scholars Choice College Savings Program (Legg Mason): This is another broker-sold plan. The plan doesn’t charge fee for opening an account, but there’s an annual maintenance fee of $20 for assets below $2,500. In addition to the funds’ expenses, the plan also adopts a portfolio-based fee structure, making more complicated than other plans. Contributions are tax deductible for Colorado residents only.

There are also five plans named by Morningstar as the worst:

Ohio Putnam CollegeAdvantage (Putnam Investment Management)
Mississippi Affordable College Savings Program (TIAA-CREF)
Mississippi Affordable College Savings Program (TIAA-CREF)
New York 529 College Savings Program (Upromise)
Nebraska AIM College Savings Plan (Union Bank (AIM))

The main reasons for those plans being put on the worst list are: 1) high costs; 2) lack of diversification; and 3) quick management changes, which are bad for long-term investments such as saving for college. I am using Ohio CollegeAdvantage (now you can earn $25 referral bonus from CollegeAdvantage plan) but, fortunately, it’s not the Putnam broker-sold plan. For me, when the most important element to consider when choosing a 529 plan is costs, which include both the administrative fees and funds’ expenses, followed by investment choices. State income deduction isn’t really an issue as I didn’t want to be restricted to the state’s plan for the tax incentive. I’d rather choose a plan that’s available nationally with low costs and solid performance.

Which plan are you using?

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Morningstar’s Best and Worst 529 College Savings Plans

Setting Up Another 529 Plan

Sun — Mon, 30 Jul 2007 13:38:36 +0000

Our second daughter is more than 4 months old already, yet I waited till yesterday to set up an 529 plan account for her. I wasn’t really waiting for anything. It has been on my mind since she was born, but I kept delaying it with no good excuses. If I didn’t read Lazy Man’s post on 529 plan over the weekend, the delay could be even longer. When our first daughter was born in 2005, I opened an account for her within the first month though.

The 529 plan I got for our first daughter was the UPromise College Fund which is tied to my Citi UPromise credit card. Though the fund is also managed Vanguard, its expense ratio (ER) is rather high (0.65% for aggressive growth portfolio) and it charges $20 annual account maintenance fee. For this plan, what I like is, through UPromise, it automatically invests rewards earned form the credit card in the fund. The $20 fee, however, is really annoying. So this time I want to get a different plan for our second daughter. And since New Jersey doesn’t offer any tax incentives for using the in-state plan, I am free to choose any plan I want, based mainly on the plan’s expenses and manager.

There were a couple of plans that I identified last year when researching for college savings plans for our first daughter, namely College Savings Iowa 529 Plan and Utah Educational Savings Plan. However, the Iowa plan charges 0.62% ER plus a $25 account maintenance fee, while the Utah plan has a lower ER (0.25% to 0.39%) , it also requires $25 annual fee that I want to avoid. Eventually, I followed Lazy Man’s suit and decided to go with Ohio CollegeAdvantage 529 Savings Plan for its lower fees (0.32% to 0.37% ER, no annual account maintenance fee). The Ohio plan is also managed by Vanguard.

The account opening process was quite simple, taking about 10 minutes to complete:

Account owner’s information, including name, DOB, SSN, driver license, and mailing address;
Email address and account user name and password;
Verification of email address;
Beneficiary information, including name, DOB and SSN;
Initial contribution selection, including amount, investment choice, and bank information;
Automatic contribution plan set up;
Successor owner information, in case, you know…

I made an initial investment of $1,200 just to make up the four months I missed and set up an automatic monthly contribution of $300, the same amount as we set aside each month for her sister. If the market can return an average between 8 to 10%, by the time they reach college age, they should each have between $14,000 and $180,000 in their college savings account if we can maintain the monthly contribution for the next 18 years. My parents supported my college education. So I feel I have the obligation to support my children as well, as long as I have the ability to do so. If they can find a job to pay part of the tuition, that’s great; if not, I want to be able to pay for the school at their choices, though $180,000 may not be enough at that time. This support, however, doesn’t come at the expenses of our own retirement savings. We both contribute close to the limit to our 401(k)s and maxed out our Roth IRA accounts every year.

The investment choice I made was Vanguard Aggressive Growth Index Portfolio, which has 85% in Vanguard Total Stock Market Index Fund and 15% in Vanguard Institutional Developed Market Index Fund. They also have aged-based aggressive portfolio, however the allocation shifts from 100% stocks to 65% equities 35% bonds when the age reaches only 6. That’s a little too fast in becoming conservative. With a 100% in equities allocation, I hope the money can grow a little faster. When our daughters get close to college age, I will do the adjustment myself to preserve the money.

Update: Open an account before December 31, 2009 and get $50 bonus.

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Setting Up Another 529 Plan

Shop and Save for College: UPromise vs. BabyMint

Sun — Wed, 21 Mar 2007 21:45:54 +0000

I have joined both UPromise and BabyMint and have accumulated more than $400 of rebates with UPromise since 2004 when I actually started to use my Citi UPromise card regularly though I had the card and joined the program in 2002. I didn’t use BabyMint a lot, not because UPromise is better (well, in some areas, yes), but I started with UPromise much earlier than with BabyMint. Generally, I feel that both programs can provide some extra help when it comes to saving for college, and when started early and used wisely (especially the investing part), the savings can make a big difference 18 years later when my children go to colleges.

The followings are my experience with these two shop and save for college programs.

How they work

Both programs are free to join and work in almost identical way: join the program online (join BabyMint or UPromise), earn cashbacks by either shopping at their respective network merchants or in store using their respective credit cards, save and invest the rewards for future college education.

How to earn rebates

Both UPromise and BabyMint have their own network of merchants and, if you browse through them, you will find companies are likely to be in both networks. So if there’s no difference between network member merchants, how about the rebates one can earn to shop through them. That will depend on what you are looking for. Since I do most of my electronic shopping online, here are some the rebates offered by UPromise and BabyMint for some sites I used most often:

CircuitCity: UPromise – 3%*; BabyMint – 1.5%
CompUSA: UPromise – 1%; BabyMint – 2%
Staples: UPromise – 4%*; BabyMint – 2.5%
Buy.com: UPromise – 1%; BabyMint – 1%
BestBuy: UPromise – 2%; BabyMint – 1%

From my experience, BabyMint offers slightly higher rebates, but UPromise has a wider selection and, from time to time, it runs promotions with extra rebates (they are currently offering extra 2%* rebates through March 31, 2007).

The two programs also offer their own credit cards for members to shop in-store and earn cashbacks. However, the BabyMint College Savings Credit Card, issued by MBNA, appears to be terminated as I am not able to find any active link to the card. On the other hand, the UPromise MasterCard from Citi is still available, which basically gives 1% back for every eligible purchase and 2% cashback for filling up your car at Exxon Mobil station. In addition, there are additional 10% savings when you buy items with “UPromise” sign at grocery and drug stores.

How cashbacks are credited

The cashback you earned either by shopping online or off-line through these programs won’t be available immediately. In fact, there are some lengthy delays before you notice the credits on your statement and that delay could be as long as two months. For example, I made a purchase on July 28, 2006 at Buy.com through BabyMint and the cashback was credited to my account on September 22, 2006. At UPromise, rebates for a transaction on January 31, 2007 was posted on March 6, 2007. However, at UPromise, a transaction made through the network shows up immediately with a “pending” status.

How to save for college tuition

What I like the most about these programs is that the cashback I earned can be automatically invested in a college savings account that’s linked to my UPromise or BabyMint account.

Every quarter, the cashback in the UPromise account can be transferred to either a UPromise College Fund managed by Vanguard or a state-sponsored 529 plan (Arkansas, New York, Iowa, Missouri, North Carolina, North Dakota, Pennsylvania, and Colorado). Similarly, rebates of $25 or more in a BabyMint account can be invested in any 529 plan or a Coverdell educational savings account linked to the account on a monthly basis. As you can see, BabyMint offers more investment choices (any 529 plan) with more flexible schedule (monthly). BabyMint, together with SAGE Scholars, also has a Tuition Rewards program that allows members to double their savings by redeeming the cashbacks as tuition credits at over 175 colleges and universities

In addition, cashbacks can also be used to pay off outstanding student loans.

How to save more

BabyMint has a referral programs that let members to save more by spreading the word. At BabyMint, every referral will receive 5 BabyMint Bucks when joining and after they accumulate at least $25 in their BabyMint account, you will receive 5 BabyMint Bucks as well. At UPromise, members can invite friends and family to join the program and allocate a portion of their cashbacks to your children’s savings account.

While both BabyMint and UPromise offer rebates when shopping through their member merchants, we should always look for the best price instead of having how much rebates we can earn as the first priority. After all, we don’t want to shop just for the sake of getting the cashbacks. Also, saving and investing for future college is a long-term project, and as any long-term investment plan, we should look beyond the returns to find the right plan. Other factors, mainly fees, are also critical in selecting a 529 plan (check out Morningstar’s best and worst 529 plans). It’s nice and convenient that BabyMint and UPromise allow us to transfer cashbacks to a linked college savings account, but that shouldn’t be the only criterion.

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Shop and Save for College: UPromise vs. BabyMint

Moringstar: The Best and Worst 529 College Savings Plans

Sun — Wed, 07 Mar 2007 16:04:19 +0000

Early last week, Morningstar released its annual evaluation of 529 college savings plans. According to Morningstar, qualities of 529 plans continued to improve in the past couple of years as plan providers reduced fees (both Fidelity and Vanguard have lowered fees of their college savings products) and eliminated high-price offerings. Good news for parents who use 529 plans to fund their children’s future education also came from the Congress as the federal tax breaks for 529 plans, which were originally set to expire in 2010, have been made permanent by the Pension Protection Act of 2006. The change of the tax law removed one major hurdle which has been seen in the past as preventing the plan from becoming more popular. In fact, according to Investment Company Institute, the growth of 529 plans has picked up speed in recent years and the new tax law will only fuel the momentum.

While giving with state-sponsored 529 plans which offer tax-incentives remains the first choice for parents, Morningstar cautions that the incentives “don’t necessarily overcome the disadvantages of a poor or costly plan.” In reviewing more than 80 college savings plans offered in 48 states and the District of Columbia, Morningstar put a great deal of emphasis on such critical aspects as plan costs, diversification, and asset allocation (which also happen to be the core of building a sound personal investment portfolio). The top five 529 college savings plans are:

Plan	Provider	Fees	ER
Colorado Scholars Choice	Legg Mason	3.5% front-end load 0.1-1.09% management fee $20 maintenance fee*	0.49-0.91%
Maryland College Investment Plan	T. Rowe Price	0.28% management fee $25 maintenance fee**	0.41-0.71%
Nebraska College Savings	Union Bank & Trust	0.6% management fee $20 maintenance fee	0.05-1.04%
Utah Educational Savings	Vanguard	0.25% management fee max. $25 maintenance fee	0.03-0.14%
Virginia CollegeAmerica	American Funds	5.75% front-end load $10 maintenance	0.42-1.9%

Among them the Colorado plan and Virgina plan are sold through financial advisors or brokers (therefore, the front-end load), while the other three are direct-sold plans. One of the main features of these plans is that they all have relatively low costs.

At the other end of the spectrum, the report also named 6 worst 529 plans:

Plan	Provider	Fees	ER
Alabama Higher Education 529	Van Kampen	0-1.1% management fee $25 maintenance fee	0.78-1.5%
Alaska John Hancock Freedom 529	John Hancock	0.75-1.65% management fee $30 maintenance fee	0.33-1.35%
Missouri MOST 529 Advisor	Upromise	0.3% management fee $25 maintenance fee	0.45-1.95%
Nebraska AIM College Saving	AIM	0.35-1.1% management fee $25 maintenance fee	0.86-1.54%
West Virginia Cornerstone SMART529	Hartford	0.47% management fee $25 maintenance fee	0.54-1.24%
West Virginia Leaders SMART529	Hartford	0.44% management fee $25 maintenance fee	0.52-1.22%

and, as compared to the best plans, they all have higher fees and ERs. Also, as noted by Morningstar, these plans don’t offer an appealing line of products.

* $20 maintenance fee is waived for Colorado and Wyoming residents and for more than $2,500 account balance.
** $25 maintenance fee is waived for direct payroll contributions, or a balance of $25,00o.

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Moringstar: The Best and Worst 529 College Savings Plans

Changes to Fidelity UNIQUE College Investing Plan

Sun — Sun, 03 Dec 2006 19:13:21 +0000

Before I applied for the then Fidelity 529 College Rewards MasterCard (now Fidelity 529 College Rewards American Express Card) back in March, I opened a 529 plan with Fidelity in order to invest the 2% rewards I could earn from the card. The plan I chose was Fidelity UNIQUE 2024 plan (which is also Fidelity’s nationally available plan), sponsored by the State of New Hampshire. In addition to the rewards earned from the credit card, I also put $100 every month into the account. The fund has annual expense ratio of 0.50% and one year return of 9.09%.

Today, I received a letter from Fidelity about some changes to the plan:

The annual account maintenance fee of $20 has been eliminated;
Account minimums have been lowered from $1,000 to $50 – or $15 a month with automatic investment;

The elimination of the account maintenance is definitely a welcome change as the $20 is about 1.67% of the total annual contribution. I have another 529 plan with Vanguard which is linked to my Citi Upromise Credit Card. That account, however, continues to charge $20 maintenance fee, though it has a one-year return of 15.94% (I chose Vanguard Aggressive Growth Portfolio for my daughter’s 529). According to a BusinessWeek online article in May, “Vanguard and Upromise charge a premium.”

In 529s where Vanguard teams up with rebate-outfit Upromise to provide administrative services – or where Upromise runs the plan alone – account holders may be paying up to twice as much in fees as their counterparts in other plans with Vanguard funds.

The plan itself has another 0.65% annual plan fees, higher than what Fidelity charged for its 529 plans, though the rebates from Upromise can offset the fees a little bit.

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Changes to Fidelity UNIQUE College Investing Plan