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KEY TAKEAWAYS

• The NJBEST 529 plan now offers a state tax break for contributions.
• Despite higher fees, the NJBEST 529 plan may be a good option for New Jersey residents with moderate to who are looking for a tax break.
• The higher fees can be avoided if you’re willing to jump through a couple hoops.

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Intro

When saving for higher education expenses, many families turn to 529 college savings plans, for good reasons. Investment growth on contributions can be withdrawn tax free if used for educational expenses, and now, funds not used for education can be rolled into a Roth IRA for the beneficiary (up to $35K). The beneficiary can also be changed and the funds used by a different child at any point.

Additionally, a 529 remains owned by the parent and is therefore considered a Parental Assets in the Free Application for Federal Student Aid (FAFSA) calculation of Expected Family Contribution (EFC). These are assessed at a maximum rate of 5.64% of the value in the EFC calculation. This contrasts with other investment tools that are considered student assets, such as Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) accounts. Student assets are assessed at 20%, a much higher rate, meaning that up to 20% of the value of a student’s assets may be counted in the EFC calculation.

Investors can set up and invest in 529 plans in any state. The decision comes down to two factors:

1. Does your home state allow a state income tax deduction for contributions? (There is no tax deduction for 529 contributions at the federal level.)
2. What are the expense ratios of the investment options provided in the plan?

In our home state of New Jersey, the state plan has never been a popular choice because there were no state income tax deductions, and NJBEST 529 has relatively high fees. Recent state income tax changes, however, may make it a wise choice for some New Jersey residents.

The most compelling benefit of contributing to the NJBEST plan is the potential for tax savings. New Jersey taxpayers with gross income of $200,000 or less can qualify for a state income tax deduction of up to $10,000 per taxpayer for contributions to the plan. This deduction can be particularly valuable for those who are in a higher tax bracket, as it can help offset some of their tax liability.

The downside, however, is still the higher fees in the plan. The NJBEST direct plan fees range between 0.30% and 0.32% for age-based options (our preferred recommendation), which is relatively high compared to many other 529 plans. For comparison, the expense ratios for individual portfolios in the Nevada-based Vanguard 529 Plan are 0.14%, regardless of target age.

Have your cake & eat it too

But if you are willing to jump through a couple of hoops, you can have your cake and eat it too by contributing to the NJBEST plan and then rolling over balances into a different account with lower fees. This approach can be particularly valuable for investors who are concerned about the impact of high fees on their long-term returns. By rolling over balances into a lower fee account, they can potentially save thousands of dollars over the life of the account.

Closing

While the NJBEST plan may have higher fees than some other plans, the potential tax savings could make it a worthwhile option for some New Jersey residents who go through these extra steps. By carefully considering their investment options and taking advantage of the available tax deductions, investors can set themselves up for success in meeting their higher education savings goals.

At WJL Financial Advisors, we can create a tailored financial plan that incorporates your objectives and helps you stay on track. We can even assist you in developing a sense of purpose to guide your financial decisions. If you’re curious about our services, feel free to call us at 215-880-1892 or email us at sean@wjladvisors.com.

So there you have it! By spending less than you make, investing the difference in low-cost index funds, and being kind to those around you, you’re not just on your way to reaching your financial goals, but also to making the world a better place. Keep these principles in mind as you continue your financial journey, and, remember: every step counts. Until next time, keep striving towards a brighter financial future!