Investment Pulse: What we’ve heard in the Third Quarter

While the quarter started quietly, as summer was in full swing, it ended with a bang as Bill Gross announced his departure from PIMCO.  As summer travel and vacations died down, we ramped up our travel to collect insights from some of the world’s largest money managers.

Socially Responsive Investing with Neuberger Berman

In early August The Center’s Investment Committee had the opportunity to speak one-on-one with the management of Neuberger Berman’s long-time successful Socially Responsive Investing (SRI) strategy.  Since this is an area that seems to be gaining in interest from our clients, we talked with some of the most successful investors to get their take on how they do it.

•  Process: They look for areas of business that have tailwinds and find the best positioned companies.  They analyze the companies for 13-15 months.  Once a company meets their expectations, it is added to their prospect list (173 names currently).  When looking to buy they ask, “Why is the price attractive?”; “Is something broken (based what they know about the company)?”; “Does the stock have value criteria?"

• SRI has five avoidance points:  alcohol, tobacco, weapons, nuclear power, and gambling.  The investment team wants a management team that makes thoughtful, long-term, fundamental decisions.

Steve Vannelli, CFA, managing director of GaveKal Capital

On a trip to Denver, CO to visit clients, Matt Chope, CFP®, Partner, spent an afternoon in September with Steve Vannelli, CFA, Managing Director of GaveKal Capital. Matt and Steven discussed many aspects of investment markets, interest rates, and the state of the economy.  Steven shared GaveKal’s proprietary approach to finding what he calls "knowledge leaders" or firms with an R&D intensity greater than that of the industry they are a part of.  He finds a correlation to these innovative companies of higher future sales growth, higher future Return on Assets, and higher market share as well as lower variability to earnings and stock returns.

Steven described how to better understand the intangible investment that many of these companies make, which he says is the key missing element in understanding the true company value. In that, he says, lies the misunderstood inefficiency in the marketplace.

Matt also learned about their proprietary quality models that scrubs the balance sheet, reviews financial leverage, calculates net debt as a percent of capital, and, most notably, intellectual property as a percent of assets of 1600 companies around the world.

Goldman Sachs, Blackrock and JP Morgan on-site visits

Matt continued his busy schedule with due diligence meetings in New York City.  Global macro themes were the main takeaways from his discussions.  Topics ranged from deflation in Europe to the energy revolution in the U.S.

While many of these companies do not currently have representation in our portfolios, the discussions with management are key to us in the overall management of our clients’ investments.  One of the worst risks you can have is the risk you don’t know about. Discussions like those we had in the 3rd quarter help us to understand where potential risks could be coming from.  While we at The Center can’t be on the ground in 20 different countries every year, we have the opportunity to leverage many experts and listen to their sometimes conflicting viewpoints.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Angela Palacios, CFP®, Portfolio Manager and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.

Are Donor Advised Funds Right for You?

Many people are charitably inclined and like to give money to churches or synagogues (among others) throughout the year.  At The Center, we fully support these efforts, but are always conscious of the most tax efficient ways in which our clients can give to their favorite charities.   One option that we often consider is a Donor Advised Fund. 

Charitable Giving

In order to take advantage of this charitable vehicle, an individual must open an account with the fund, and deposit cash, securities or other similar financial instruments.   By taking this approach, you can set funds aside--even if you aren’t sure exactly where you want them to go-- and still take the tax deduction in the year that the donation was made. 

Who Should Consider this Strategy?

An example of where a strategy like this might make sense is if you are in your peak earning years, but approaching retirement in the next 3-5 years.  You might need the charitable deduction more now than you would in retirement when your income would probably be less and your tax liability lower.

For illustrative purposes, let’s assume that Joe and Jane Smith are 58 years old and are employed with a taxable income of $300,000.  This places them squarely in the 33% marginal tax bracket. However, in retirement, they anticipate they will only need $140,000 of taxable income to sustain their desired standard of living. This would place them in a 25% bracket.  Every year Joe and Jane like to give about $10,000 to their church.  A donor advised fund may make a lot of sense for Joe and Jane because, if they know they are going to make the gifts anyway, they can set the money aside now and take advantage of the tax deduction at a 33% marginal rate as opposed to a 25% rate.

As always, be sure to consult with a qualified financial professional before incorporating any of these ideas into your own personal financial plan.

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

This material is being provided for information purposes only and is not a complete description of all information necessary for making a decision, nor is it a recommendation to buy or sell any investment. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. Consult a tax or legal professional for any specific tax or legal matters. C14-034226

Will the Bull Market Run out of Gas Soon?

 18 months ago, I wrote about “3 bull market killers still not being present” in this market, but now the landscape is changing ever so slowly.  I still get questions from clients and others regarding the market being high. I say, consider these factors:

•  The market’s nominal price has made over 50 new all-time highs since my last writing of this blog.
• 20 years from now, with an average annual gain of 9% per year, the equity market could be looking at a DOW JONES average in the 100,000 range – while 20 years ago, the Dow Jones was hovering around 4,000 (this is a hypothetical example for illustration purposes only. Actual results will vary).
• 12 of the last 20 years the Dow did not make a significant new high, but still averaged almost 10% a year.

Those numbers don’t tell the whole story. So when I’m asked, “Do we still have time before this bull runs out of gas?” I look at the gauge and start getting uncomfortable because of three markers.

3 Bull Market Markers to Watch

The three things that tend to kill a bull market are inflation, interest rates, and valuations. Only one of these is present now. First look at inflation, where we are tracking at one of the lowest rates in history -- less than 2% annually. Then check out interest rates, which are still at the lowest levels in history. Consider that the 10-year treasury at just over 2%. And finally, look at equity valuations -- these measures are just over the historical averages of 15 times earnings. 

History as our guide would tell us that until all three of the bull market killers are present this bull is still alive, but aging.

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions. In 2012 and 2013, Matt was named to the Five Star Wealth Managers list in Detroit Hour magazine.

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Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Past performance may not be indicative of future results. C14-033941

Where are we in the full market cycle?

Cycles exist everywhere.  One of the first cycles we learn about as a child is the water cycle or the journey of a raindrop. There’s something about the circularity of cycles that I just love.

The economy and financial markets also cycle. An economic cycle is the periodic ebb and flow of economic growth like Gross Domestic Product or employment.  According to the National Bureau of Economic Research the average economic cycle lasts a little less than six years.  This span is measured both from one peak to the next peak or one trough to the next trough.  While six years is an average, the cycle can be much quicker or much longer than six years. 

The Cyle of Economic “Seasons”

The various stages of the economic cycle can be thought of like seasons of the year as shown in the chart below.  From winter, or recession, where jobs are lost and the economy is shrinking to summer, where growth is accelerating and jobs have been recovered. 

Every quarter we take a poll at The Center to see where team members think we fall in this spectrum.  Our consensus is that we believe we are in the midst of summer meaning that this bull still has some room to go as we are still lacking some keys signs of a maturing economy like inflation and volatility.

Stock Market Cycles

The stock market also goes through cycles and, along with it, investor emotions ebb and flow.  Usually the stock market cycle is slightly ahead of the economic cycle meaning that market indexes often peak before the economic cycle peaks.  Our latest survey of our employees placed the stock market cycle near excitement in the picture below.  At this point (excitement/thrill/euphoria) investors start to question why they don’t have more aggressive positions because they have clearly performed very well and many even start to shift their portfolios in this direction.  As Warren Buffett said”

“Be fearful when others are greedy and greedy when others are fearful.”

Refocusing on the Long Term

This is the point when it is most important to stay in a diversified portfolio, not abandon your long-term investment objectives while reaching for more returns. Rebalancing at these market extremes may go against what investors want to do, for example, selling your stock positions to buy more bonds right now or selling your bonds in 2009 to buy more stocks. However, going against these basic emotions have potential to be the best decisions you can make for your portfolio.  Navigating these emotions is the single most difficult road block to the success of an investment strategy.  While markets and economies will cycle as long as water continues to cycle, having sound financial advice during these market extremes can make big difference in the success of your long-term financial plans. 

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investing involves risk and investors may incur a profit or loss regardless of strategy selected. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investing involves risk and investors may incur a profit or loss regardless ofstrategy selected. C14-031971

Investment Commentary - September 2014

Clients and Friends,

While much of our communications with you in the last few months have been about The Center’s recent move, our intensive investment focus is always present. The last few months were marked by many insightful conversations with portfolio managers and investment professionals. This reminds me that at our core, our investment process is focused on good old fashioned research whether it comes to the way we construct asset allocation mixes or how we select investments for your portfolios.

Here is some news for you from our investment team:

• We’re more than halfway through 2014 and the financial markets have picked up where they left off last year. Not only are stocks measurably higher this year, but bonds have made a rebound with positive returns as well. We’ve got a new one-page investment dashboard that sums up the current investment world. We’ll update this one-pager each quarter going forward. Let us know what you think of the new look and feel.

• Angie Palacios, CFP® provides a great recap of the Morningstar Investment Conference which is held in Chicago each June. This is a can’t-miss conference each year and 2014 was no exception. She includes notes about employment predictions for the US economy and focus on international as some of the key takeaways this year.

• Our quarterly investment pulse includes recaps from four meetings held here and around Detroit and highlights the extraordinary access we’re able to get to investment professionals because of size and reputation. I particularly enjoyed a meeting with Joseph Brennan and Lee Norton from Vanguard. The discussion was broad and interesting including how Vanguard, known for their preference for indexes, identifies active investment managers for their offerings.  With several other top-notch investors giving us time for lengthy discussion, you can see the quality of discourse we are privileged to entertain.

• Matt Chope shares insight from a conversation with one of his favorite investors – Charles de Vaulx – who is a portfolio manager with IVA.

Do you have investment-related questions for us? Please don’t hesitate to let me or your financial planner know. Thanks again for your trust and commitment to The Center for the opportunity to work with you to pursue achievement of your financial goals!

On behalf of everyone at The Center,
Melissa Joy, CFP®
Partner, Director of Wealth Management
CERTIFIED FINANCIAL PLANNER™

Melissa Joy, CFP®is Partner and Director of Investments at Center for Financial Planning, Inc. In 2013, Melissa was honored by Financial Advisor magazine in the Research All Star List for the third consecutive year. In addition to her contributions to Money Centered blogs, she writes investment updates at The Center and is regularly quoted in national media publications including The Chicago Tribune, Investment News, and Morningstar Advisor.

Financial Advisor magazine's inaugural Research All Star List is based on job function of the person evaluated, fund selections and evaluation process used, study of rejected fund examples, and evaluation of challenges faced in the job and actions taken to overcome those challenges. Evaluations are independently conducted by Financial Advisor Magazine.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Melissa Joy and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investing involves risks and investors may incur a profit or a loss regardless of strategy selected.

Is now the time for Active Management to shine?

 What is active and passive management?

Active management is an investing strategy in which investment professionals strive to outperform specific benchmarks. Passive management is an investing strategy that attempts to mirror the return pattern of a specific benchmark.

Can active managers actually outperform benchmarks?  The debate between active and passive management is not new, but in my research on these two very different management styles, I uncovered something that actually caused my jaw to drop.  I found research from Vanguard showing that just as markets are cyclical, there are cycles to management.  Sometimes active management wins, but passive management outperforms at other points, as shown in the chart below.  Over the past 10 years, every time interest rates went up (the orange line), the percent of active fixed income managers that beat their index also went up (the yellow line). 

Benchmark used: Barclays U.S. Government Bond Index

Over the past 10 years (and looking beyond this chart, the past 30 years) interest rates have been on a downward march, making it difficult for active managers to add value over their fees for a very long time.   There have been brief periods of rising rates though as shown in the chart above.  

What does this mean now for portfolios now?

Interest rates are near 30 year lows.  While I don’t believe they will go much lower they should soon start to trend upward…though it could be tomorrow, next month or a year from now.  A bet on passive investing in fixed income, at this point, is against the odds in an environment with such low and potentially increasing rates.  Active managers may have their chance to shine after what has seemed like a period of prolonged underperformance to their benchmarks.

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

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Source: “The Active-Passive Debate: Market Cyclicality and Leadership Volatility”, Vanguard Research July 2014

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Every investor’s situation is unique and investors should consider their investment goals, risk tolerance and time horizon before making any investment decision. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Indexes are unmanaged and cannot accommodate direct investment. C14-027422

Searching for yield outside savings accounts, CDs or treasuries

 A few nights ago my 7-year-old daughter and I sat on her bed and opened up her “Ariel the Mermaid” coin bank as it was starting to overflow.  While we were rolling up the coins she asked, “What are we going to do with this money?”  I explained we are going to the bank and deposit it into her account and, in exchange for holding it, they will pay her more money.  Her eyes lit up and she asked how much. Putting it as simply as possible, I explained that her $20 bill would earn about $.05 in one year.  She looked at me with her brow furrowed and said why would I do that? 

Why, indeed, is a good question many savers are asking themselves today.  People are feeling compelled to take much more risk in order to earn what a simple savings account was paying me when I was a teenager.

Seeking Higher Returns

During the recent Morningstar Investment Conference, many portfolio managers were expressing concerns on this vey topic.  Investors have gravitated toward high yield and floating rate bonds at alarming rates in the past few years in the absence of a reasonable interest rate from the savings accounts, CDs or treasuries. The chart below shows how many billions of dollars have flowed into strategies that invest in floating rate (blue bar) and high yield bonds (gray bar) each of the last ten years. You can see the spike in the past five years as rates were driven to historical lows by the Federal Reserve.

1^st Quarter JP Morgan Guide to the Markets; Flows include ETFs and are as of May 2014. Past performance is not indicative of comparable future results.

Many investors don't realize that high yield bonds are highly correlated to stocks and when stocks go down these types of bonds will also likely take a hit.  Even more concerning managers like Ben Inker of GMO and Michael Hasenstab of Franklin Templeton, see a lack of liquidity in this market.  This means if they do start to go down and people start running for the exits, there may be no willing buyers in the marketplace until the prices get low enough, resulting in potentially amplified losses to the investors left holding the bonds.  Suddenly the 4.9%* interest rate doesn't sound high enough for taking on that level of risk.  These types of investments should be no substitute for a regular savings account even though the interest rates are embarrassing!

So while my daughter may never know compelling savings accounts yields in her childhood, I still find teaching her this simple process of money and saving an invaluable lesson to start at a young age!

*Yield on Barclays Capital Corporate High Yield Index as of 6/30/2014

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. Bonds are subject to interest rate risks. Bond prices generally fall when interest rates rise. High-yield (below investment grade) bonds are not suitable for all investors. When appropriate, these bonds should only comprise a modest portion of your portfolio. All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses. The Barclays Capital High Yield Index covers the universe of fixed rate, non-investment grade debt. Pay-in-kind (PIK) bonds, Eurobonds and debt issues from countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included. Original issue zeroes, step-up coupon structures, and 144-As are also included. Michael Hasenstab, Ben Inker and GMO are independent of Raymond James. C14-022057

Strategy for an Intra-Year Market Drop

 With minutes remaining in the game, my youth hockey team had just scored, sending the nail-biter state championship into overtime. I was 11 then, and I remember the packed stands full of parents waving signs and pom poms. The other teams were even cheering us on. Only a few minutes into overtime, I watched the puck deflect off our own player's skate into the net, ending the game and our season in agony. Through the tears and heartbreak, I'll never forget what coach said to us, "we didn't play our game." Not the most comforting line after such a loss, but it was 110% true.

That year, our team had been undefeated until our final opponent took us down. The reason we were so successful was because we had a game plan that worked for us and we stuck to it. It wasn't anything fancy; we just did the simple things really well and were consistent. If we had our backs against the wall or faced adversity during a game, we stayed true to what we knew about winning. But that's not what we did when it mattered most. We let a very good team get into our heads and it caused us to make bad decisions. We didn't stick to the game plan that had provided us with so much success through the season - something that can also easily happen to investors during a market pullback or a time where there is fear and uncertainty. 

At the Raymond James national conference in Washington D.C. in May, I listened to a JP Morgan presentation about past, present, and projected market conditions. The most intriguing fact I heard was this:

Since 1980, the average intra-year market decline has been 14.4%. However, 27 out of those 34 years, the market has closed the year positive.

So what does that tell us? To me, it highlights the importance of having a game plan and a strategy and sticking to it. The market will not always move in a straight line up like we have seen over the past few years, so being prepared for bumps along the ride is imperative. As my hockey team experienced, when you begin to deviate from a disciplined strategy, bad things can happen.

Making knee jerk decisions during difficult times can cause you to stray off your path to financial independence. This is when we, your financial planners, step in as coach to talk you through the game plan that we have helped you establish. It is a team effort and working together through the good times and bad is what we do best for our clients.

Nick Defenthaler, CFP® is a Associate Financial Planner at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

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Past performance may not be indicative of future results. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. C14-019163

What should I do with bonds if interest rates go up?

 Lately the bond markets have been making headlines.  It’s no secret that we, as a country, are in a historically low interest rate environment and, as a result, a lot of so-called “experts” are talking about rising interest rates in the near future.  These experts usually go on to state that if interest rates begin to rise and you have bonds you could face substantial losses.  Unfortunately, like many things in finance, this type of blanket statement is misleading because not all bonds are created equal! 

Traditional Bonds

First, let’s dissect their argument to understand why an investor might lose money in a rising interest rate environment. Bonds are typically issued by a government, a municipality, or a corporation.  These entities need money for a variety of purposes and one way they can get that money is by taking a loan from investors.   In exchange for an investor loaning that money to these entities, there is a promise to pay back the original loan amount (principal) as well as an interest rate paid on that principal over the life of the loan.  The challenge and the risk to current bond investors is that if interest rates begin to rise, the traditional bonds they hold might not look as attractive to new potential investors.  If you think about it, why would I, as a new potential investor, want your bond paying an interest rate of 3.5% when I can buy a new bond from the same company (or government/municipality) paying 4.5% today?  Assuming all else is equal except the rate of interest, then I think the answer is pretty clear. It would be silly for me to purchase a bond paying 1% less. 

So how does the bond holder with the unwanted 3.5% bond get rid of it?  The answer is he has to sell it at a reduced price.  This reduction in price is the big risk that experts keep referring to.  It’s important for investors to remember that if you hold individual bonds you will get your principal back at maturity as long as the company stays in business and doesn’t default.  Regardless of what your statement says the bond is worth at any given time, that value or number only applies if you choose to liquidate the bond at that exact point in time.  

Hopefully, this very simplistic example helps you understand the inherent risks involved with more “traditional” bonds and a rising interest rate environment.  As I said, not all bonds are created equal, and some types will probably benefit from a rising interest rate environment. 

Floating Rate Bonds

It’s probably clear by now that the biggest issue, in a rising interest rate environment, is the fixed rate of interest that “traditional” bonds pay.  If rates started to rise, and the interest rate on your bond rose along with it, then you probably wouldn’t have to discount your bond much, if at all. 

So are there bonds out there that can rise as overall market rates rise?  Yes! They are called floating rate bonds.  A floating rate bond typically “resets” its interest rate annually, although some will reset more frequently.   Because of this “reset” floating rate bonds can be a very attractive investment option when overall interest rates are projected to rise in the near term.  Please keep in mind that floating rate bonds aren’t without risk of loss…the point is just that they typically maintain their secondary market value even when interest rates rise.

Now that you have read this, the next time you see the headlines that claim bonds are bad and to avoid them like the plague, you should have a good sense of what type of bonds they are referring to.  Also, know that it is still possible to make money in bonds in a rising interest rate environment!  Floating rate bonds may or may not be suitable for your portfolio.  In order to make that determination you would need to perform a total portfolio analysis in coordination with your financial professional.

Matthew Trujillo, CFP®, is a Registered Support Associate at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

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As with any fixed income investment, there is a risk that the issuer of a floating rate investment will be unable to meet its payment obligations. In addition to the risk, floating rate bonds also face the following risks:

Reference rate risk: While the market value of a floating rate bond under normal circumstances is relatively insensitive to changes in interest rates, the income received is, of course, highly dependent upon the level of the reference rate over the life of the investment. Total return may be less than anticipated if future interest rate or reference rate expectations are not met. It is also important to note that since short-term rates are usually lower than long-term rates, the initial coupon of a floating rate bond is typically lower than that of a fixed-rate bond of the same maturity.

Call risk: A floating rate bond may be issued as either non-callable or callable. If a callable floating rate bond is called by the issuer prior to maturity, the investor may be unable to reinvest funds in another floating rate bond with comparable terms. If the floating rate bond is not called, the investor should be prepared to hold it until maturity.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning Inc. and not necessarily those of RJFS or Raymond James. C14-013999

A Timely Reminder About 529 College Savings Plans

With school now out for most universities, who would want to talk about college planning?  But I couldn’t pass up 5/29 without discussing 529 plans!  All corny jokes aside, a 529 college savings plan is a fantastic vehicle to utilize for higher educational costs and something that all parents that plan on sending kids to school should at least consider.   

A 529 is a state sponsored educational savings account where the money in the account grows tax-deferred.  One of the major benefits of the account is that the funds are not taxed upon withdrawal (even growth), as long as they are used for qualified educational expenses (tuition, room & board, books, etc.)  A 10% penalty and ordinary income taxes would apply to any earnings portion of non-qualified distributions.  Many states (including Michigan) also offer a state tax deduction on contributions, up to a certain limit, which is an added bonus for the owner of the account.    

To maximize the benefits of a 529 plan, young parents can establish the account early for their children to allow for many years of potential growth. Typically, as the child approaches the first year of college, the plan becomes more conservative.  If other family members would like to assist with college expenses, they too can open an account for the child.  The child is the beneficiary of the account and the account owner or “custodian” is the person in charge of the account.  Unlike an UGMA or UTMA (which used to be a very popular savings account for school), the child does not automatically have access to the account at age 18 or 21. The custodian has complete control.  The beneficiary can also be changed on the account at any time, but typically this occurs if the child gets a scholarship or decides to not attend college.  This provides flexibility so the money can still be utilized for educational expenses for another child or family member.

As with any financial planning decision, a 529 may or may not make sense for your personal situation.  However, it is a great tool and resource to consider when taking on the challenge of saving for college.  If you ever have any questions about college planning or would like to dig a little deeper, don’t hesitate to contact us. That’s why we’re here!

Nick Defenthaler, CFP® is a Associate Financial Planner at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 college savings plans before investing. More information about 529 college savings plans is available in the issuer’s official statement. The official statement is available through your financial advisor, and should be ready carefully before investing. Rules and laws governing 529 plans are varied and subject to change. There is a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Before investing, it is important to consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Investors should consult a tax advisor about any state tax considerations of any investment in a 529 plan before investing. C14-015839