We have waited and waited all year long for a market discount to arrive offering us an opportunity to engage our long-standing 529 Investor program. But alas, 2017 literally set the record for low volatility effectively blocking out any opportunity to add cash to our 529 plans at a market discount. So with only a few days remaining, here’s the best advice I can offer.
Get Your Contributions Done Anyway – To Cash
For those who are unaware of our 529 investor protocol, let’s take a second to review the typical plan. The basics of 529 college savings plans are that they are very limited both in terms of investment options as well as limits on the number of transactions allowed annually (only 2 per calendar year!). Effectively every 529 college plan out there wants us to put money into a passive index fund and just leave it alone. That’s fine under most market conditions, but as risk managers, we think there are a few ways to game the system. After all, we might make our annual contribution right at the top of a long-term price peak and watch our balance and recent investment, immediately shrink. While that’s always a possibility, we can improve our odds by doing one simple thing.
We can be disciplined about buying market discounts.
Of course, in rare years like 2017, there are no discounts (ie market pullbacks).
But for all other market years, we typically see at least one if not two pullbacks of 10% each. For 2018, we’re going to see at least one and it should be larger than 10%.
So here’s the recommended plan for our 2017 College Investment.
Given that we still have a few business days left, we’re going to:
- Change our “Future Contributions” allocations from whatever investment you have chosen, say an “Aggressive” allocation to 100% cash. This does not mean change your “Existing Funds” allocation to 100% cash but rather just direct your future contributions to cash. We are going to use one of our two annual transactions to make this change if you don’t already direct your contributions to cash. Got it?
- Make your contribution for 2017 – up to $14,000 per parent per child. Here’s the best site for all the details, rules and restriction on the amounts you can gift each year to 529 Plans.
Contributions to 529 plans are deductible against state income taxes so let’s not pass up on the opportunity to cut our tax bill and put money away for our kid’s education at the same time. Let er rip.
- Wait for a reasonable pullback in the market to change your “Existing Fund” Allocations to a fully invested portfolio. Remember, after making your contribution to cash now, you won’t be fully invested right? Once again, you will be using one of your two available transactions to make this change.
- Follow this Red Sky Report regularly looking for instructions to make the change described in #3. These instructions will happen after the market has completed a correction and the risk of loss is much lower. We can also use this discount in 2018 as our opportunity to make our 2018 contributions! We call these instructions “Calling All Cars”. Stay on the lookout for these notices.
- Bonus Advanced 529 Investor Action Item – If you still have both of your two annual transactions left for 2017. Use one to change the “Future Contributions” to cash as described in #1. Use the other to change your allocation of “Existing Funds” such that you have at least 10%, preferably 15%, of total portfolio assets invested in Emerging Markets. Be careful not to choose an option that will direct your “future contributions” to this new allocation in the process. This is an option for those who actually put together their own portfolios of individual funds rather than choosing one of the present risk buckets, like “Aggressive” or “Growth”, or any of the Age-Based Solutions.
This recommendation and advice is based solely on market risks and opportunities today and does not take into account any individual investors’ situation including the ages of your children, proximity to college, etc. If you have specific questions about your situation, we would be happy to offer individual advice which may be different than everything you just read.
Now, go to your plan website and get er done before the year expires. Tick Tock.
For those of you that have not yet opened a 529 Plan, but are considering doing so, please review the important 529 Plan Information Guide below.
CollegeInvest 529 Plan Guide
Eligibility: Anyone can establish a 529 Plan in Colorado but would only qualify for an income tax deduction if they are a CO taxpayer.
Tax Benefits: CollegeInvest Savings Plans allow Colorado residents to deduct every dollar you contribute to your account from your Colorado state income taxes in the calendar year you make the contribution.
Earnings on your account can grow federal and Colorado state tax-deferred.
Withdrawals for qualified higher education expenses are also exempt from federal and Colorado state taxes.
Annual Limit for Gift Tax Exclusion: $14,000 single/$28,000 married couple per beneficiary in a single year without federal gift tax consequences.
Maximum Lifetime Contributions: Colorado maximum lifetime contributions for a 529 Plan is $400,000. The aggregate balance of all accounts for the same beneficiary under all Colorado 529 Plans cannot exceed this limit.
Management of the CO 529 Plans: Colorado has 4 different plans as follows:
CollegeInvest Direct Portfolio – Managed by Vanguard
Smart Choice 529 Savings Plan – Managed by FirstBank
Stable Value Plus 529 Savings Plan - Managed by Metlife
Using the 529 Plan: The beneficiary can use the funds in the 529 Plan at any eligible higher education institution; private or public college or university, in state or out of state, trade or graduate school, in the nation and many abroad.