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Weekly Market Commentary


An Introduction to 529 Savings Plans

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May 29th is recognized as National 529 Day. We thought it would be good timing to review the basics of 529 savings plans, which are a popular tool to help plan and save for higher education expenses. A 529 plan is an investment account with tax advantages used to pay for education from kindergarten through graduate school, though it is commonly used for college. Also known as a “qualified tuition program”, the 529 was authorized by Congress in 1996 to encourage saving for higher education expenses.

While there are many advantages generally associated with 529 savings plans, they provide two significant federal income tax advantages: tax-deferred growth and tax-free withdrawals if used for qualified education expenses. It’s important to note that while state income tax rules generally follow favorable federal tax treatment, there are some states that tax residents on earnings from out-of-state plans, so it’s best to check with your specific plan.

Here is a practical example of how parents of a newborn might use a 529 plan to save for college expenses. Parents of Destiny, a newborn baby, open a 529 account and contribute $200 monthly over the course of 18 years. Assuming a 6% rate of return, an investment of $43,200 over 18 years would grow to over $77,000 by the time Destiny enters college at age 18. With the ability to avoid both federal and state taxes, the 529 plan would allow Destiny’s parents to eliminate taxes on $33,800 of investment earnings ($77,000 balance - $43,200 total contributions) to use on higher education.

Qualified higher education expenses include the following:

  • Tuition, fees, books, supplies, and equipment required for a designated beneficiary’s enrollment or attendance at an eligible educational institution.
  • For an eligible student (enrolled at least half-time) for any academic period, the reasonable costs for that period incurred by the designated beneficiary for room and board while attending the institution.
  • For a special needs beneficiary, expenses for special needs services that are incurred in connection with the beneficiary’s enrollment or attendance at the institution.
  • Expenses for the purchase of computer or peripheral equipment, computer software, or internet access or related services if the equipment, software, or services are to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible educational institution.
  • Expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school; the amount of cash distributions from all qualified plans with respect to a beneficiary during any tax year can’t, in aggregate, include more than $10,000.
  • Fees, books, supplies, and equipment required for a designated beneficiary’s participation in an apprenticeship program that is registered and certified with the Secretary of Labor under Section 1 of the National Apprenticeship Act.
  • Amounts paid as principal or interest on a qualified education loan of the designated beneficiary or a sibling of the designated beneficiary.

Additional advantages of a 529 savings plan include:

  • Low maintenance – Many plans allow you to select an automatic investment plan so you don’t have to remember to contribute to the plan or reallocate the investments.
  • Favorable financial aid treatment – When a dependent student’s parent or a dependent student owns a 529 savings plan, it’s reported as a parental asset and has a relatively minimal effect on financial aid eligibility. Distributions from parent- and student-owned accounts aren’t counted as income on the Free Application for Federal Student Aid.
  • Owner control – The 529 savings plan account owner has legal control of the account funds and can distribute the money as needed to ensure the beneficiary isn’t using the funds for nonqualified expenses.
  • No income restrictions – You can invest in a 529 plan regardless of how much you ear. Plus, there is usually no minimum to get started.

What if I overfund the account?

A question we often receive regarding the use of 529 savings plans is related to overfunding the account or the child later deciding not to attend college. There are a few strategies that can be used to help combat these concerns.

It’s important to note that you can withdraw funds penalty-free to the extent the beneficiary’s expenses were reduced due to education tax credits, amount of scholarships, veteran’s education benefits, or other tax-free payments of expenses. You also may withdraw funds penalty-free if the beneficiary goes into the military, becomes disabled, or passes away. In addition, 529 savings plans can generally be used at vocational or other post-secondary institutions in the U.S. as well as many foreign institutions.

While a 529 savings plan can stay active for the life of the beneficiary, you may find that the beneficiary will never use the funds that have accumulated within the account, but you don’t want to pull the funds and pay taxes and/or a penalty fee (you can pull the funds with a 10 percent penalty tax and distributions are includible in gross income). A simple way to avoid those consequences is to transfer the 529 savings plan into another beneficiary’s name. If the new beneficiary is a family member of the account owner, there will be no tax implications.

As with any of these planning techniques, please consult one of our team members to see how it affects your specific situation.

Note: Due to the Memorial Day holiday, next week we will not be distributing Weekly Market Commentary. 
Equities bounced back last week as investors gained more confidence that the debt ceiling issue would be resolved. The major indexes were all positive with the S&P 500 Index +1.71%, the NASDAQ +3.08% and the DJIA +0.50%. International stocks also squeaked out some gains with the EAFE +0.36% and EM +0.51%. In terms of market cap, both mid and small-cap stocks were also positive on the week, with the Russell Mid Cap Index returning +1.06% and the Russell 2000 (small cap) Index returning +1.93%. Bonds bucked the positive trend we saw in equities and were negative domestically and globally as yields continued to rise across the yield curve. The Bloomberg US Aggregate Bond Index declined -1.37%, while the US Corporate High Yield Index fell -0.42%. The Bloomberg Global Aggregate Bond Index fell -1.51%.

Recession Indicator?: According to Northwestern Mutual’s 2023 Planning and Progress Study, about 67% of adults in the US anticipate a full-blown recession later this year. With that in mind, about 50% of folks surveyed are building up savings, while 41% are putting off “large expenses” until the economy shows signs of improving.

Debt Limit Debate: Debt limit negotiations are underway and financial regulators, politicians, and federal employees are having a stressful month. But what’s with this budget ceiling metric, and why is it taken so seriously? After all, Congress has never failed to raise the debt limit when called to—in fact, it’s acted 78 different times to raise, redefine, or temporarily extend the debt limit since 1960.

Why are People so Pessimistic on Housing: High prices plus high interest rates which has led to a collapse in affordability. The mortgage payment needed to buy the median priced home for sale in the US has moved up to $2,573, a new all-time high.

Tax Revenues: US Federal Tax receipts fell 6% over the last year, the largest YoY decline since June 2020 and before that May 2010. At least part of the drop was attributed to lower capital gains taxes paid in April as we went from a booming year for asset prices (2021) to the largest decline since 2008 (2022).

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