The Vanguard Group is well-known across the mutual fund industry for its low-cost approach to investing. It has extended its positive reputation with the offering of its 529 savings plans. Investors searching for 529 savings plans want a convenient way to save for education with minimal cost and the ease of opening an account online. The Vanguard 529 College Savings Plan offers 20 individual portfolios and three age-based portfolio models that can accommodate a variety of investment styles. As with other Vanguard mutual funds, this is a direct-sold product. Read on to find out more about these plans and what Vanguard has to offer.
- A 529 savings plan is a low-cost way for someone to save for the education of a child or grandchild.
- The plan was originally designed to allow people to save for higher education.
- Plan rules were expanded under the Tax Cuts and Jobs Act and the SECURE Act.
- The Vanguard 529 College Savings Plan is sponsored by the state of Nevada, and offers savers three age-based models.
- Vanguard's is among the cheapest plans available on the market and offers a stellar lineup in its portfolio.
What Are 529 Plans?
A 529 plan is a savings tool designed to help investors save for the educational expenses of their children or grandchildren. All 529 plans, also known as qualified tuition plans, are tax-advantaged savings plans—just like individual retirement accounts (IRAs)—and are sponsored by various entities including schools, states, and state agencies.
Every 529 plan covered the cost of post-secondary education in the past, but the Tax Cuts and Jobs Act (TCJA) expanded the usage of plans to include all forms of education including K to 12. Another bill, the Setting Every Community Up for Retirement Enhancement Act (SECURE)—signed into law on Dec. 20, 2019—further expanded the rules surrounding 529 plans. According to Section 302 of the Act, plan holders can also use funds to pay for qualified expenses relating to a beneficiary's apprenticeship program including tuition, other fees paid to the institution, and course material. Programs must be approved by the Department of Labor. Another change includes the ability to withdraw a maximum lifetime amount of $10,000 per student to pay down qualified education debt.
There are two different kinds of 529 plans: Prepaid tuition plans and education savings plans.
Prepaid Tuition Plans
Through this plan, account holders buy credits that can be applied to tuition and other fees at public or in-state colleges or universities. These are purchased at the current price. The costs for housing, and elementary and secondary school tuition are not included in this plan. These plans are not guaranteed by the federal government but are sponsored by certain state governments and agencies.
Education Savings Plans
Account holders who open this kind of 529 plan can use the funds for any type of educational expense including tuition, mandatory fees, as well as housing costs. The beneficiary of the plan may also be able to use the plan toward fees at any school including those outside the United States. Savers can also use up to a maximum of $10,000 to pay for tuition at public, private, or religious elementary or secondary schools.
How 529 Plans Work
Investment options in all 529 plans vary based on the goals of the saver. The portfolio may be comprised of different vehicles including stocks, bonds, mutual funds, and exchange-traded funds (ETFs).
The owner of a 529 savings plan creates an account for a beneficiary or student. The account earnings are free from federal tax as long as the funds are used for qualified education expenses such as college tuition, books, and room and board. The owner of the account determines when the funds are distributed for higher education.
The plan is tax-deferred. This means earnings are deferred from both federal and state taxes. Most states also allow the saver to deduct 529 savings plans contributions on their state tax returns. Withdrawals for qualified educational expenses are tax-free.
529 Plans Are State-Sponsored
As mentioned above, 529 savings plans are generally sponsored by each state including the Vanguard 529 College Savings Plan. This plan is sponsored by the state of Nevada, and is administered by the Board of Trustees of the College Savings Plans of Nevada and chaired by the Nevada State Treasurer. Investors do not have to be residents of Nevada, nor does the beneficiary have to attend a Nevada school.
Vanguard also offers its mutual fund selection within the College Savings Iowa 529 Plan, which allows for a minimum investment of $25.
Age-based portfolio models are popular within 529 plans. There are three age-based portfolio models offered in the Vanguard lineup:
- Conservative age-based
- Moderate age-based
- Aggressive age-based
Vanguard offers three age-based models that are automatically shifted as the child ages and gets closer to college.
Within each of these three categories, there are several age brackets for the child starting from 0 to 5 years, 6 to 10 years, 11 to 15 years, 16 to 18 years, and over 19 years. The portfolio management automatically adjusts the models as the child ages, moving to the less risky portfolio—comprised of stocks, bonds, and short-term reserves—as the child nears college age.
The individual portfolios range from a conservative money market to stock portfolios that can be used to customize the investor's own strategy.
Features and Benefits
The Vanguard 529 plan is a low-cost, direct-sold investment with a wide selection of well-managed portfolios. The convenience of opening and maintaining an account online without paying a sales commission keeps a simple process for do-it-yourself investors. The Vanguard 529 plan is highly rated among its competitors.
Lower cost-plans appeal to investors and Vanguard makes use of its index mutual fund offerings to keep expenses down. There is no enrollment fee for opening a Vanguard 529 College Savings Plan, and there are no commissions or transfer fees. According to Morningstar, Vanguard's 529 plan is a top-rated choice, especially because of its low cost. It is, in fact, the cheapest among Morningstar's choices.
The expense ratios for the Vanguard Plan are among the lowest in the industry. The age-based portfolio models have an expense ratio of 0.15%, and the individual portfolios range from 0.15 to 0.44%.
Vanguard vs. Other 529 Plans
The Vanguard 529 plan has consistently ranked among the top plans as rated by Morningstar and did receive gold rankings every year since 2012. The group did drop the plan to silver ranking. The reason? Morningstar noted that the plan's fees are still fairly cheap—below average, in fact—but it hasn't been able to keep up to date with the industry and its competitors, which has consistently tried to keep investment fees low.
The fund's saving grace is its lineup. Morningstar highly recommends the plan for its investment strategy, which is made up of underlying Vanguard index funds. It also recognizes the fund's ability to transition holdings from stocks to bonds through its age-based construction.