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Tax Day has come and gone, but investors are always looking for tax-advantaged strategies.
An excellent starting point for this conversation, particularly for investors that are family planning or have young kids, is the 529 education savings plan. Like municipal bonds, 529 plans can be issued by states and over a variety of tax advantages.
Contributions to 529’s are tax deductible, but the perks don’t end there. Equity income and bond interest payments earned within these plans aren’t taxable nor are withdrawals, provided the capital is being allocated toward education expenses. In other words, money investors direct to a 529 can’t one day be used for a boat or a vacation home unless they want to deal with the tax consequences.
529’s Positive for Investors
While many investors are familiar with instruments such as 401K’s, IRA’s or 403B’s, they aren’t knowledgeable of 529’s. Much of that is attributable to the fact 529’s don’t get the mainstream financial media attention that retirement vehicles do.
However, as college costs are rising at a pace that far surpasses inflation and there 90 529 plans to consider, investors may want to seek professional advice when attempting to navigate the 529 landscape. Fortunately, it’s not a stretch to accomplish goals in this arena.
“Morningstar rates 62 plans, and only three currently earn a Morningstar Analyst Rating of Gold. This top-level rating is based on an assessment of four underlying pillar inputs: People, Process, Parent, and Price,” writes Morningstar analyst Patricia Oey. “The individual pillars consider best-in-class industry practices that, when rolled up to the Morningstar Analyst Rating for 529 Plans, reflect our confidence in the plan’s potential to provide participants with a thoughtfully structured and risk-aware process that generates compelling performance relative to peers.”
Investors in Illinois, Michigan and Utah, among some other states, are in luck because those three states offer 529 plans rated “gold” by Morningstar.
“Each offers a well-designed age-based or target-enrollment series, which are set-it-and-forget-it investment options that gradually de-risk during the accumulation and savings period,” adds Oey. “These series can serve as a default choice for most investors, similar to a target-date series for retirement savers. These Gold-rated plans also employ a solid menu of static options of mutual funds and/or exchange-traded funds that provide exposure to individual asset classes and a safe vehicle to park cash, such as an FDIC-insured savings account.”
529 Points of Emphasis
When it comes to helping investors work their ways through the world of 529, there are similarities to the worlds of exchange traded funds and index funds. Investors want choices, flexibility and low fees.
Fortunately, many of Morningstar’s gold-rated 529 plans check some or all three of those boxes.
“One distinctive feature that is offered only by the Utah plan is the ability to create a custom series in which investors design their own glide path and select the underlying investments. The investment menu includes 22 options, such as Vanguard index funds and DFA funds that cover broad asset classes, style and size, and strategies with a sustainable investment focus,” notes Oey.
Investors should focus on the potent combination of tax benefits, choice, flexibility and low costs to achieve 529 success - that’s commendable when considering what the end game is here.