The Change-up 1.30.2023: 5 Things to Know About 529 Plans

Happy Monday!

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Quote of the Week

““We are what we repeatedly do. Excellence, then, is not an act, but a habit””
— Aristotle

*As of market close 1/27/2023. For the week of 1/23/2023.

The Story

Check out the Nasdaq up double digits on the year! Stocks continued to rebound from the previous week on Monday, with all markets up over 1%. After mixed results on Tuesday, we saw all indexes down early on Wednesday after Microsoft reported its slowest sales growth in over six years. Then they rebounded as the day went on for no specific reason, finishing close to even for the day. Sometimes that just happens 🤷‍♂️. We were up again on Thursday, with the NASDAQ, in particular, capitalizing on Tesla's strong earnings report and continued that momentum into Friday.

My View

I want to talk about GDP. Gross Domestic Product is the market value of all goods and services produced by a country in a given time frame. When GDP is positive, it shows the economy is healthy and expanding. When GDP is negative, the economy is contracting. GDP is technically the real indicator of a recession, with two consecutive quarters signaling the bad news. Whether you agree or not with that definition, GDP gives us pretty good insight into the economy as a whole.

In Q4, Real GDP increased at a 2.9% annual rate. This was mainly due to inventories and goods/services bought by US households. But "Core GDP", which excludes government purchases, inventories, and international trade due to their volatility, was only up 0.2% annually. I read an article this week by FirstTrust that noted the Core GDP growth rate is usually this low before, during, or just after recessions.

So what does that mean? Certainly, the economy is tightening. Salesforce, Microsoft, and others have all laid off employees in the last month. Home volume is way down. So are retail sales. As for the stock market, only time will tell. There's no one on this planet that knows what is in store tomorrow, next week, or the rest of the year. My best advice would be to own quality assets with long-term intentions.

As legendary investor Warren Buffett put it, "Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future."

Coming Up This Week

  • January's consumer confidence data (Tuesday)

  • Federal Reserve meeting decision (Wednesday)

  • Earnings reports continue

Scott's Tots. Those words bring back a burning feeling of cringe. In this episode of The Office, Michael Scott makes a promise to a classroom of 8 year old's that he would pay for their college tuition if they graduated high school. The promise motivated the kids to excel in school, and the show picks up when they are ready to graduate. They have a party to celebrate Michael, ("Hey, Mr. Scott, what you gonna do, what you gonna do make our dreams come true") but Michael realizes he can't financially pay for their college and tries to make it better by offering them laptop batteries 🙃. 

This episode is so tough to watch because college expenses are a big deal. Because of that, a lot of people want to set aside money to pay for someone else's education. The best way to do that is through a 529 plan. 

Here are the 5 things to know about 529 plans

 

1️⃣ Tax Advantages

While money contributed to a 529 isn't federally tax deductible, you can potentially receive a state income tax deduction if you invest in your state's plan. Money inside of a 529 plan also grows tax-deferred, meaning you don't owe any tax on the investments while they are in the plan. Even better, withdrawals are tax-free as long as the money is used to pay for a qualified expense (tuition/books/supplies/room and board).

 

2️⃣ K-12 and Trade Schools

Most people use 529 accounts to save for college, but there are other tax-free options available for the money. You can use up to $10k/year from a 529 to pay for tuition in connection with a K-12 school. If the beneficiary of a 529 is more interested in a trade school, the plan can pay for that tax-free too.

 

3️⃣ Changing Beneficiaries

Because you have to select a beneficiary for the 529, what happens if that person doesn't go to  school or use all of the money? Luckily, 529s are pretty transferrable to other family members. Some of my clients transfer money from child to child to pay for school. I've also seen families pass money from a child to a grandchild. 

 

4️⃣ 529 👉 Roth IRA

A new bill passed in December opens the door to transfer money from a 529 account to a Roth IRA. There are a couple of restrictions here that you'll want to be aware of, but this is a great way to put extra money to work.

 

5️⃣ When to NOT Use a 529

I've spent a lot of time on the benefits of a 529 account, but it's not for everyone. If the beneficiary is getting close to college age, you probably won't experience enough growth to warrant a 529 contribution. Some people also save money for a beneficiaries expenses that aren't education related (home down payment/car/etc.). If your intentions aren't to save for school, think about using a UTMA instead of a 529.

Thanks for reading and have a great week,

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The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate to complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Austin Coley and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. 

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