Q: For a Louisiana resident, what is the best 529 college savings program?
Whenever a client asks us about setting aside monies for college expenses for children or grandchildren, our first question is: Do you want to have flexibility to use these monies for something other than qualified education expenses? If the answer is yes, then we explore certain options. If the answer is no, meaning they want these monies to be specifically designated for education, and if they are a Louisiana resident, then most of the time the best solution to give them is:
A: The Louisiana 529 Program – called START for Student Tuition Assistance and Revenue Trust.
Before explaining why this is the case, it is important to know that, while the 529 program was created at the federal level, the program is implemented through the states, thereby allowing each state, within the federal guidelines, to add their own spin.
So, what makes the LA 529 START program so special? For starters, it is not broker-sold, which right off the bat tells you it has a lower cost structure because brokers are not being paid a commission to sell it. Additionally, the program does not charge any administrative fees.
Secondly, for Louisiana residents, START has what is called an Earnings Enhancement feature. Depending on your taxable income, the program will match between 2% and 14% of every dollar contributed.
Third, married couples filing jointly may take a LA state tax deduction for every dollar contributed to the program of up to $4,800 per year, per beneficiary (single filers can deduct up to $2,400).
Lastly, the investment options are low-cost Vanguard funds.
In summary, for LA residents, START offers:
- No commissions or administrative costs.
- Earnings Enhancements/Match
- State Tax Deductions
- Excellent Low-Cost Investment Options
So, why did my broker/advisor put me in a 529 program offered by another state?
While it might seem obvious that a LA resident would never use any other state’s 529 program, we have seen many such cases over the years. Why? It might be because brokers who work on a commission basis have no financial incentive to suggest the non-brokered START program. In our opinion, that is bad form, and let us explain why.
Consider an actual case that was brought to our attention recently where a married couple was put into a brokered 529 plan offered through another state. By looking at the details, we were able to approximate the additional costs incurred by using the non-LA program. Assuming they contributed $4,800 each for two beneficiaries (total of $9,600), the additional costs could be as follows:
- 25% upfront commission = $408.
- The Loss of the 2-14% Earnings Enhancement = Between $192 and $1,344.
- Higher LA State Taxes: Assuming tax brackets of 0-6% = Between $0 and $576.
- Higher Investment Expenses: The program’s annual fund expenses were 0.93%, versus the average START fund expense ratio of 0.17%. The difference of 0.76% means they are paying about $73 of additional investment expenses annually.
If you total this all up, the additional cost of using the non-LA 529 program could be between $673 and $2,401 more in the first year. In subsequent years, in addition to not having the benefit of the Earnings Enhancement monies, they would also have the higher annual investment expenses referred to in #4 above.
Fortunately, while they cannot undo what has been done, they can move those monies from the non-LA program into the LA START program, allowing them to potentially benefit from the Earnings Enhancement, the state tax deduction, and the ongoing lower expenses.
While there are a lot of moving parts to 529 plans, and while individual circumstances will dictate what works best for you, it is hard to imagine a situation where a LA resident would use another state’s 529 program. If you would like to know more, please feel free to reach out to us or google “Louisiana START Program” and visit their website.
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About the Author
George Holland joined Billeaud Capital Management in 2009. Since entering the investment advisory business in 1989, George has provided independent investment and financial advisory services to individual clients, as well as holding management positions at an independent trust company, a broker dealer/investment advisory firm, and running his own investment advisory business. George earned a B.A. degree in Economics and a Masters in Business Administration from Louisiana State University…. Read more.