Making The Most Of Your 529 Plan? Financial Advisors' Daily Digest

by: SA For FAs

Invesco US: How do summer jobs affect 529s and financial aid?

AllianceBernstein: Spooked investors are bailing out of emerging markets as fundamentals are improving.

Vanguard: The new tax law makes almost the entire gross return from hedge funds subject to tax. Muni bonds, anybody?

Just 29% of Americans understand the financial advantages of using 529 education savings plans according to a recent survey. Created in the late 1990s as a tax-favored way to save for college, last year’s Tax Cuts and Jobs Act has expanded their use for private K-12 education as well. Closing the awareness gap on such plans is of extreme urgency because too many critically needed dollars are lost to savings accounts that don’t benefit from 529s’ tax shelters, while some inattentive wealthy folks are still letting their lawyers create trust funds which tax income at a high rate, are costly to maintain and cede control to beneficiaries who may lack the experience and judgment to use their gift wisely.

Because Uncle Sam is a hungry cookie monster, gobbling a portion of your earnings and taking his cut when you make purchases, it behooves you to take advantage of such vehicles as exist to shelter earnings from taxes and to take income and capital gains tax-free. That includes 529s; Roth IRAs are another great way to flexibly fund big-ticket items like education.

Today’s SA includes an article from Invesco US that addresses one important aspect of 529 account decision making: namely whether an accumulating balance will diminish a student’s eligibility for need-based financial aid. I quote:

Determining the potential impact of a college savings plan all comes down to the formula that FAFSA (Free Application for Federal Student Aid) uses to calculate aid eligibility.

That calculation is based on two factors: income and assets, including any funds contained in a 529 account. The federal aid formula assesses parental assets at a maximum rate of 5.64% (in other words, for every $1,000 in a 529 account, the ‘expected family contribution’ toward college costs could increase by a maximum of only $56). If your dependent child owns a 529 account in his or her name, those funds will be counted as parental assets and assessed at this same 5.64% rate — considerably lower than the 20% rate at which other types of assets can be assessed.”

Thus, from Invesco US’s quantitative perspective, 529s are a good way to go since the limitation in borrowing for financial aid is small in comparison to forms of savings not benefiting from 529s’ tax advantage.

True enough, but I would add other considerations in favor of unfettered savings. First, saving is a good and responsible thing for parents and children to do. Achieving those savings through the student’s own contributions via a summer job is an especially good way to accomplish this objective. Learning the value of work, sacrifice and building toward a goal is more than many students learn over a four (or five or six) year university education. Second, racking up debt can be perilous. Sure, leveraging debt to invest in one’s human capital is a good way to employ debt, but this subtlety is lost on many students and their parents in a college-funding system that allows students to take on more debt than they can reasonably discharge based on future earnings.

These are small points, but material ones given the low level of savings and high levels of debt typical of today’s college students. Indeed, a more rational system of credit would likely allocate smaller loans, with better net results on a societal basis. So don’t sweat the financial aid minutiae. Focus on that summer job and on Junior’s learning how to allocate savings between current and future consumption.

And below please find links to other articles of interest on today’s Seeking Alpha:

Emerging Markets

Investors withdrew $2.7 billion from US-domiciled emerging market equity funds in May, reversing 17 consecutive months of positive flows, but the panic may be premature, and investors may be missing the bigger picture of improving fundamentals. (Alliance Bernstein)

Hedge Funds

​Many of those high fees that hedge fund investors are paying are no longer deductible; almost the entire gross return is subject to tax. Today's high-net-worth investor could do better with muni bonds. ​(Vanguard)

A new Harvard study shows hedge funds tend to sell stocks after talking them up at conferences, “talking their book.” What does this mean for alpha seekers? (SA Eli Hoffmann)

Roth IRA Conversions

What is the difference between a "backdoor Roth IRA" and a "mega Roth" and how can my clients utilize them? (Janus Henderson Investors)

Risk Conditions

“Short-term trading conditions continue…much improved from a quarter ago. Also noteworthy is the reduced volatility. Some investors were spooked out of their holdings by volatility earlier in the year. Even though levels were in line with historic norms, and even though volatility is not a leading indicator of declines, it was too much for some.” (Jeff Miller)

Advisor Succession

Some advisors are concerned with what will supply their revenue after they retire, others with how they’ll spend their time when not tied to an office. Just as they ask of their clients, advisors need to get clarity on what they want for themselves. (Janus Henderson Investors)

Summer Reading

The hidden DNA of Amazon, Apple, Facebook and Google; the 12 technological forces that will shape our future; and the history of the Korean War. (BlackRock)

Economic Policy

Starbucks’ Howard Schultz is considering a run for the presidency in 2020. What kind of economic policies could a reform-oriented moderate base his candidacy on? (Laurence Kotlikoff)


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