Financial Planning Blog

If you have young children (or grandchildren) and you are starting to save for anticipated higher education expenses, a 529 college-savings plan is an excellent vehicle--if you choose the plan carefully. Just for review, a 529 college savings-plan is a state-sponsored savings plan that allows you to invest significant amounts of money in a tax-favored account for the benefit of your children, grandchildren, other relatives, or friends. This money grows (or, at least that's the idea) tax-deferred until it is withdrawn tax-free to pay qualifying higher educational expenses. (Of course, if the funds are not used for qualified expenses, taxes and penalties will be due.)

If you are an Idaho resident, should you just stick with the IDeal-Idaho College Savings Program? Or, should you check out the other 100+ plans out there, since you are not required to use a plan sponsored by your home state, or the state where your child may choose to attend college? You may have heard negative stories about plans high-cost plans that have not served their investors well over the years. This has been a real problem, especially with broker-sold plans where "financial advisors" put unknowing investors in high commission, high cost plans when better, lower cost direct-purchased alternatives exist. Brokers have reportedly even put naive investors into 529 plans that pay the broker commissions, but that do not allow the investor to take advantage of valuable state tax deductions that would be available with less expensive in-state plans. Remember, we're talking about the financial services industry where it is always buyer-beware!

The bottom-line on the IDeal-Idaho College Savings Program is that while it may not be the best plan out there, it has a number of fine things to recommend it. For those of us who are Idaho residents and taxpayers it should be our first choice in 529 plans. Here are a few qualities that make IDeal a good place for your education funding:

• IDeal's underlying investments are Vanguard index funds. These low-cost funds are favorites among knowledgeable, passive investors. Index funds "buy the entire market", giving you the diversification you need, and assuring you of market returns. Unfortunately, the cost advantage of these low-cost Vanguard funds is lost to some extent by the administrative costs of the plan. These administrative fees (from the program manager, Upromise, and the state) bring the total cost of the investments up to .75% per year--which isn't bad for a 529 plan, but there are many with lower costs.
• IDeal is simple--even boring. Now that may turn some people away, but this is appropriate in a 529 plan. Many of the participants are novice investors and it is critical for the plan to make it easy for suitable asset allocation and investment decisions to be made. With IDeal, you do choose between individual mutual funds, but between very simple portfolios of index funds. Sure, your choices are limited, but this makes it impossible to create an undiversified portfolio. And, the age-based portfolio options give you three choices (conservative, moderate, and aggressive) all which transition into appropriately safer portfolios as the beneficiary nears college age. If you choose to use the six fixed asset allocation portfolios rather than the age-based ones, you can dial in the risk level that is appropriate for your particular situation--however you will still have no choice regarding the underlying funds in the portfolio.
• Investments in IDeal are eligible for an Idaho state income tax deduction. With a marginal state income tax rate of 7.8%, this means the taxpayer saves $78 for each $1,000 invested--on up to $8,000 contributed per year by a married couple ($4,000 for a single person). This is a big deal, and offsets the advantages you may find in out-of-state plans with lower costs or wider choices.

If you are an Idaho resident currently saving for your children's college through IDeal, good for you. Your money is still at risk, as it is in any investment, but you can be confident you have made a good choice in selecting your home-state plan.

If you have more than $8,000 ($4,000 if single) to invest in a 529 any one year, or if an out-of-state relative wants to contribute to a 529 plan for your children, you may want to consider some similar (but lower cost) plans in another state. More on that in Part 2.