Reply to DC 529 plan vs out of state options

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[quote=Anonymous]I think that you can have the tax deduction for multiple years if you continue to contribute or if you put in multiple years worth of contributions in at the outset.  But still, you could lose money with the Calvert plans.  (From the CGDEV blog linked to earlier--it's an old blog though,  I think Utah is now the darling in terms of low fees.)  I think the State Street plan fees are about .51%, but that may not work for every investor depending on their risk tolerance and age of child.

[quote] For a typical investment option (a fund for kids aged 6--10, like mine), Calvert and the DC government extract 1.30% of the saver's money, plus a $15 account maintenance fee, each year. Nationally, according to this list, the cheapest state plan open to non-residents is Ohio's which charges 0.24% for a similar portfolio, one that is managed by---you guessed it---Vanguard. Meanwhile, I occupy the DC goverment's top income tax bracket, whose rate is 8.5%. So my local government is offering me this deal: save 8.5% once by putting up to $4,000 into our plan; then pay about 1%/year extra until your kids go to college. Not such a good deal. This spreadsheet compares Calvert/DC and Vanguard/Ohio more carefully by simulating a case in which I put in $4,000/year and the market goes up 5%/year. After 18 years, Vanguard/Ohio earns $42,697 while Calvert/DC earns just $33,424, for a difference of $9,273. At the current tuition inflation rate, this will let me buy my younger son lunch at the campus cafeteria during at least one parental visit.
 
Seriously, this is not chump change. Now, if I invested through Vanguard/Ohio, I'd lose that 8.5% DC tax deduction. We can factor in this loss by reducing the Vanguard/Ohio gain figure above by 8.5%, from $42,697 to $39,068. This still exceeds the Calvert/DC gain by $5,644. In other words, despite the DC tax incentive, I would lose money by investing through Calvert/DC. Calvert/DC's high expenses not only consume the entire DC tax break; they also dip into my pocket.

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