Learn the tax benefits, fees, and investment options associated with the Vanguard 529 College Savings plan.
For parents around the country, opening a 529 savings plan offers the opportunity to knock down the price tag on college by a significant margin. Given the high and rising cost of education today, these financial tools are becoming more and more essential to the funding of a child’s future, but with so many different 529 plans to choose from, parents often struggle to differentiate one program from another. In this piece, the experts at Sootchy will outline the details of The Vanguard 529 College Savings Plan in a comprehensive guide; keep reading to learn more.
When looking at any 529 plan, the first question to ask should always be what type of plan it is. All 529 plans fall into one of three categories – education savings plans (formerly called college savings plans), prepaid tuition plans, and ABLE accounts. Each has its own unique features, but we’ll focus on the first variety here, since The Vanguard 529 College Savings Plan is an education savings plan.
The way these 529 plans work is simple. The account owner chooses how the money in the plan is invested, then they (and their friends and family) can make contributions that will grow over time. Unlike other investment accounts, 529 savings plans are exempt from federal income tax, as well as most state income tax, so long as they’re spent on education-related expenses.
The exact details of these plans – from the number of investment options to the cost of maintaining the account – vary from one state to another, as each state creates its own program. The Vanguard 529 College Savings Plan is overseen by the State of Nevada, for instance, though investments are managed by Ascensus College Savings.
One of the first numbers to look at before applying for a 529 plan is the minimum initial contribution, which is how much you need to deposit when first opening a plan. Not all accounts come with this requirement, but The Vanguard 529 College Savings Plan does, and it’s one of the highest. New account owners who are Nevada residents will need to contribute $1,000 to the plan up front or $50 through an automated employer investment plan, while out-of-state residents will need to deposit $3,000. After that, each contribution must be at least $50.
In addition to the minimum contributions on accounts, each also has a maximum contribution limit, though few plans will ever come close to reaching it. This number – $500,000 with The Vanguard 529 College Savings Plan – sets a limit on how high the balance of an account can get before you have to stop making contributions, but you won’t be penalized if your balance grows beyond that point.
In any 529 savings plan, there are two kinds of investment portfolios: age-based portfolios, which automatically become more conservative over time, and static portfolios, which only change at the direction of the account owner. Within these categories, plan owners can pick from a predetermined list of investments, and some plans have more options than others.
The Vanguard 529 College Savings Plan has one of the widest selections of portfolios among all 529 programs. Account owners who prefer an age-based investment can place their funds into one of 11 portfolios, while those with static portfolios have 20 portfolios to pick from – five multi-fund portfolios and 15 single-fund portfolios.
Naturally, the performance of these portfolios can vary significantly; with The Vanguard 529 College Savings Plan, five-year rates of return run from less than 2% (the Interest Accumulation Portfolio) to more than 20% (the U.S. Growth Portfolio).
Though often overlooked, the various fees that come with 529 plans can play a big part in how successful an account ultimately is. Like other details, the fees of 529 plans vary from one program to the next and are often different within the same program as well.
For example, The Vanguard 529 College Savings Plan comes with a baseline 0.11% program management fee, plus an investment fee of anywhere from 0.03% to 0.31%. The final tally of what you owe on the account can therefore be anywhere from 0.12% to 0.42% of the account balance, depending on what portfolios you choose.
Although many states seek to incentivize investments in their plan by offering tax deductions or credits for contributions, this isn’t an option in Nevada, a state with no personal income tax. That said, residents of a few states will find that their local government offers a tax benefit for contributing to any 529 plan, including The Vanguard 529 College Savings Plan.
If you have contributed to a loved one’s Vanguard 529 plan and live in Arizona, Arkansas, Minnesota, Kansas, Montana, Missouri, or Pennsylvania, you may be eligible for a tax break (up to a certain limit, generally).
While the many factors governing 529 plans can make these accounts seem overly complicated, it’s actually quite easy to get started on an account, especially with assistance from Sootchy. Just download the free Sootchy app today to get started on your account, and you can even manage investments and make contributions to your new plan through the app – as can your friends and family. Learn more about the benefits of 529 plans, including The Vanguard 529 College Savings Plan, by visiting Sootchy online.