Our Thoughts on Oregon’s 529 Plan

Periodically, we are asked about options for saving for college for one’s kids or grandchildren.  In 1996, the federal government allowed states to set up Section 529 college savings plans.  In addition, there is the option to use a Coverdell educational savings accounts, formerly known as an educational IRA.  In this blog post, though, we will narrow our focus to the question, “if I’m an Oregon resident and I plan on investing solely in a U.S. index fund, should I use Oregon’s 529 or some other state’s 529 plan?”  The answer, in short, is use Oregon’s 529.  The long answer is a function of the state tax benefit you receive by contributing to an Oregon 529 versus the lower fees structure of some other 529 programs.1

Oregon’s 529 U.S. stock index fund has a current expense ratio of 0.32% while New York, due partially to its size, has a rock-bottom expense ratio, at least as 529 plans go, of 0.17%.  New York uses the Vanguard Total Stock Market Index while Oregon uses the TIAA-CREF Equity Index Fund.  We wouldn’t expect much difference in these two funds over long periods of time.  We assumed a marginal tax rate of 10.8% which is relevant for a couple with taxable income over $250,000.  The maximum contribution deductible for Oregon state tax purposes is currently $4,455; this amount is adjusted for inflation going forward.  We assumed our couple contributes this amount to capture the tax deduction.  We also assumed our couple turns around and contributes the amount saved in taxes to their child’s 529 plan, but receive, of course, no tax benefit for this.  The eventual market return won’t change the conclusion, but we assumed 5%.  Below is a graph of the results of this analysis.  Using Oregon’s direct 529, the couple saves over $10,000 in taxes which, along with compounding (even in a higher cost 529), turns in to a $13,000 advantage to using an in-state 529.  Even with a lower marginal tax rate, an Oregon taxpayer still comes out ahead using the Oregon 529.

Oregon 529

One strategy that can be employed is contribute the amount necessary to get the maximum Oregon tax benefit to the Oregon 529 plan and contribute amounts over that, if any, to one of the lower cost plans; you are neither restricted to using your state’s plan nor having only one account for your child.

Whatever plan you decide to use, the sooner you start, the more you are likely to accumulate for college education expenses due to potential compounding.  If you want more information, you may want to check out these resources:

 

The site below is a comprehensive site dedicated to all the ways to save for college:

http://www.savingforcollege.com/

Morningstar recently came out with their 2013 ranking of 529 plans.  You can check that out with the link below:

http://news.morningstar.com/articlenet/article.aspx?id=615151

Below is the link to Oregon’s 529 direct site where you can learn more about the plan and open an account online:

https://www.oregoncollegesavings.com/home.shtml

 

1We only considered going directly to Oregon 529 as compared to using a broker-sold Oregon 529 by MFS Investment Management.  The additional fees charged by MFS are likely not worth paying.  Each state has their own 529 program with different features, investment options, and fees.  Fees and investment options are subject to change.  Consult your tax advisor as your unique circumstances may change the assumptions and conclusions above.