Home Adviser Fund Update 529 Plans to Lose Tax Benefits? Published February 27, 2015 Adviser Investments Named to Barron’s Top-5 Adviser Investments has been ranked #4 on Barron’s list of the “Best Massachusetts Financial Advisors” in its Feb. 23, 2015 issue. The ranking is based on assets under management, revenues generated, regulatory record, quality of practice and philanthropic work as determined by Barron’s editors. This follows Adviser Investments placing 24th on Barron’s ranking of the Top 100 Independent Financial Advisors in the U.S. and 8th on its list of “Best Massachusetts Financial Advisors” in 2014. We think this is a great testament to our firm’s dedication to offering top-quality investment management to a broad range of investors, and we’re honored to be recognized once again. To read our full press release, please click here. 529 Plans in the Spotlight In January’s State of the Union address, President Obama proposed a fundamental change to the tax benefits of 529 plans. He suggested that investment earnings be taxed as income and that the revenue be used to expand a tuition tax credit targeted at the middle class. Within a week, he had abandoned the proposal amid uproar from both political parties and parents nationwide. The volume of the backlash was telling testimony of the popularity of these college-savings plans with people who use them, and provides a good time to review what they are and how they work. A Smarter Way to Save for College 529 plans are fantastic, tax-advantaged vehicles designed specifically for investors helping a child, relative, friend or even themselves save for tuition and expenses related to higher education. Plans are sponsored by states, generally in partnership with a mutual fund company or institute of learning, and usually offer either a number of investment options to choose among or a means of locking in a tuition rate. Anyone can set up a 529 plan for a designated beneficiary, and all withdrawals that go towards “qualified educational expenses” (which include tuition, room and board, books, a computer and peripherals, and even internet access) are exempt from federal and (usually) state taxes. There are no income restrictions and no limit to the number of plans you can enter into, though withdrawals above and beyond the costs of those qualified education expenses (or non-qualified withdrawals in general) are subject to federal and state income tax, as well as a 10% penalty. Even though 529 plans have been around since 1996 (the “529” comes from the relevant section of the Internal Revenue Service’s tax code), a May 2014 Edward Jones survey found that 70% of participants did not know what they were. Despite this relative lack of awareness, as of June 2014, there were 11.8 million active 529 accounts nationwide, accounting for more than $244 billion in total assets. With the average annual cost of tuition, room and board at a four-year private college continuing to soar (up 3.6% year-over-year to $42,419 in the 2014–2015 school year, and considerably more at the most exclusive schools), parents, grandparents and other interested benefactors cannot start saving soon enough. Two Types of 529s, Equally Tax Exempt 529 plans come in two flavors: Savings plans and prepaid tuition plans—take a look at the table below to see a list of characteristics for each. States have their own unique plans, and are allowed to offer both savings plans and prepaid tuition plans. Many states do offer additional tax benefits for residents, but you are not restricted to the plan in your home state. For certain investors, it will be worthwhile to explore plans in other states to find the best fit. Savings Plans A good comparison for savings plans is a Roth IRAA type of account in which funds can be saved and invested without being subject to tax until the account holder reaches retirement age., to which you contribute after-tax income and then can make tax-free withdrawals from in retirement (for more on Roth IRAs, please click here). A 529 plan operates under the same basic principle (contributions cannot be deducted from your federal taxes), but is solely geared to the costs of college or university. Your 529 will be invested in mutual funds, so your return depends on the performance of the holdings in your portfolio. You’ll have the opportunity to invest in a selection of individual stockA financial instrument giving the holder a proportion of the ownership and earnings of a company., bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. and money market funds, and many plans feature pre-made portfolios, including age-based options that automatically reallocate funds from stock holdings to lower-risk bond and money market funds as the beneficiary gets closer to college age. The Two Types of 529 Plans College Savings Plan Prepaid Tuition Plan No lock on secondary education costs. Locks in tuition prices at eligible public and private colleges and universities. Covers all qualified higher education expenses: Tuition, room and board, fees, books, computers, internet access. Plans cover tuition and mandatory fees only. Many plans have contribution limits in excess of $300,000 per beneficiary. Most plans set lump sum and installment payments prior to purchase based on age of beneficiary and number of years of tuition purchased. Investment options are subject to market riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline.. Your investment could decline in value. Many state plans backed or guaranteed by the state. No age limit. Open to adults and children. Most plans have age/grade limit for the beneficiary. No residency requirement. Nonresidents may only be able to purchase some plans through financial advisers or brokers. Most state plans require owner or beneficiary to be state resident. Can change beneficiary to another family member if money is no longer needed. Refunds or transfer options vary state by state. Enrollment open all year. Most plans have limited enrollment period. Source: Smart Saving for College, NASD. Investors have two types of savings plans to choose from. In direct-sold savings plans, investors buy 529s directly from a given state’s plan, are responsible for their own research and pay no sales charges. This type of plan is good for the cost-conscious, do-it-yourselfer who doesn’t mind taking the time to research which state’s plan is the best fit and is comfortable choosing among the available investment options. If you do not wish to pick your own investments, you can go through a broker, who will invest your money for you, but at a price. Broker-sold programs can be subject to fees, sales charges and/or annual distribution fees, all of which can cut into your potential gains. Prepaid Tuition Plans Any college, university, vocational school or other postsecondary education institution is generally eligible to participate in prepaid tuition plans. This type of 529 plan enables college savers to buy credits at participating schools to lock in future tuition prices. Most prepaid tuition plans are sponsored by state governments for residents, and cover tuition and fees only (books and room and board are excluded). They are typically guaranteed by the state backing them. With prepaid tuition plans, you are not investing in mutual funds—instead, you are making a bet against rising tuition prices. Depending on the state or plan, there may some flexibility as to where you can apply your credits, but these types of plans are often optimized for in-state school tuition—for out-of-state or private schools, you may find yourself having to make up the difference between the plan’s assigned value and tuition out of pocket (some private schools do participate in prepaid tuition plans, however). It should be noted that many of these plans require you to start investing years before your beneficiary is of college age, and they do not guarantee admission to participating schools. If your beneficiary chooses not to attend college or is not accepted, most states have refund options, or the plan can be transferred to another family member. Prepaid plans can be a good fit for some, but they have more strings attached than savings plans and offer less of an opportunity to grow your investment beyond the cost of in-state college tuition. Next Steps There are many considerations in finding the best college savings investment plan for you. We recommend consulting with a trusted financial adviser to determine the best fit. Stay tuned for updates in the coming months that delve deeper into individual states’ plans and benefits. About Adviser Investments Adviser Investments is a full service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trustsA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. Assets placed in a trust are generally safe from creditors and can be sold by the trustee in short order, avoiding the lengthy and costly probate process., institutions and foundations since 1994, and have more than 3,500 clients across the country and over $6 billion in assets under management. Our portfolios encompass actively managed funds, ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index., socially responsible investments and tactical asset allocation strategies, with particular expertise in Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. Our minimum account size is $350,000. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868. Disclaimer: This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations, personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed. Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged. Past performance is not an indication of future returns. The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. We do not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. The Barron’s rankings consider factors such as assets under management, revenue produced for the firm, regulatory record, quality of practice and philanthropic work. 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