Let’s talk about our kid’s college saving fund today. I’ve been planning to transfer our college savings from Oregon to Vanguard and I finally got it done this month. Why transfer? Basically, because we will pay lower fees and there aren’t any drawbacks. This post probably will be most interesting for Oregonians, but it might be helpful for parents living elsewhere, too. Read on…
College is getting too expensive
First a little background. My parents paid for the majority of my college education and I want to help our kid out in the same way. Mrs. RB40 also got some help from her parents so both of us graduated with minimal debt. Of course, we went to college in the mid 90s and the price of higher education has exploded since then. The average Class of 2016 graduate had over $37,000 in student loan debt. From what I’ve seen, the cost will continue to increase and I’d really hate to saddle our kid with a monster debt at the start of his career. It’s not a hardship for us to help out so we’ll try to give him a good head start in life. We’ll also make clear that he shouldn’t expect any inheritance. Personally, I think a good education is worth a lot more than a receiving a bequest upon our passing.
We’ve done pretty well with our college savings so far. RB40Jr was born in 2011 and we’ve been saving to his 529 plan since then. We chose the Oregon College Saving Plan because the contribution is deductible (up to $4,660 in 2017.) The Oregon state income tax is pretty high at 9-10%. Here is where we are at with our Oregon plan at the end of Q1 2017.
- Total Contribution: $41,820 over 6 years.
- 3/31/2017 Balance: $57,350.
I think we’re in good shape. The current balance should keep growing and we’ll continue to contribute about $4,600/year over the next 12 years. However, I’m sure the college cost will be ridiculous when our kid is 18 in 2029. The projected cost of sending a kid to the 4 years public in-state degree is $250,000! We’ll do our best and see how it goes.
The estimates vary widely. I think $250k is probably pretty accurate. That’s tuition, room & board, books, etc… It already cost $35k/year to attend our alma mater in 2016. Of course, there are ways to reduce the expenses. If we can’t afford 4 years, then I’d suggest living at home for a couple of years and attend a college nearby.
Why do I want to transfer our 529 plan to Vanguard? The main reason is lower fees. I also prefer Vanguard over TIAA-CREF because I’m a big fan of Vanguard. Let’s look at the fees.
For the basic funds, Vanguard’s fees are about 0.10% lower. That doesn’t sound like much, but it adds up once the balance is bigger. We’d save about $60 per year at Vanguard with our current balance. However, the account will keep growing and the amount saved will grow as well. Our account will be active for at least 12 to 16 more years so we’ll probably save over $1,000 once it’s all said and done. That’s not a huge amount, but every little bit counts. Maybe RB40Jr can buy a text book or two with that extra money…
The more complicated funds are not as easy to compare, but the fees are lower at Vanguard across the board. The Age-based funds in particular look better at Vanguard. Parents can choose aggressive, moderate, or conservative for the age-based portfolio and Vanguard will do the rest. That’s short and simple.
*The Vanguard plan has a $20 annual fee if your balance is below $3,000.
Transferring our account
Okay, here is the plan. I’d transfer our current balance from Oregon over to Vanguard. By the way, this is a Nevada plan. Then I’ll keep adding to my Oregon account every year so we can get the state tax deduction. Once the balance at the Oregon plan goes over $20,000, then I’ll transfer again.
This way, I’ll get the best of both worlds – state income tax deduction and low fees! Is this really possible? Wouldn’t the Oregon want the income tax deduction back if I transfer my account to Nevada? This is called recapture tax and most states charge this tax on outbound rollovers; however, Oregon is one of the few states that doesn’t.
I was worried about the recapture tax so I contacted the Oregon College Savings Plan and the Department of Revenue quite a few times. The answers were consistent and they all said no recapture tax on rollovers. The only caveat is you can rollover just once in a 12-month period. If there is more than one rollover, then it will be considered a non-qualified withdrawal. That’s bad because the earnings will be subject to income tax and a 10% penalty.
*This post was written in 2017. You can see if your state charges recapture tax – comparison of 529 plans at Savingforcollege.com. You should check with your state’s Department of Revenue about the recapture tax to make sure, though.
It took a couple of weeks to process the transfer because we had to fill out the paperwork and send it in the mail. It’s done now and I’m pretty happy to see our 529 at Vanguard. I’m familiar with Vanguard funds and it’s easy to see what funds we’re invested in. For now, I put 80% into the Total Stock Market Index and 20% into the Total Bond Market Index. It’s easy and I won’t have to worry about it much.
That’s all I’ve got today. Do you think it was a good idea to go with lower fees at Vanguard? Do you plan to help your kids with their college education?
Related post – Why we are using the 529 plan to save for college.