529 Investment Fund Options from Andy Seth on Vimeo.

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There are two main changes to be aware of, one benefiting those whose children are not yet in college and the other for those whose children are already in college.

• 1. Investments Can Be Changed TWICE in the 2009 Calendar Year: Historically, you could only change the investments once a year but due to the recent market fluctuations, you can now change the investment choices twice a year. This is for money that is already invested but here’s a tip:
  
  If you are contributing money on a recurring basis, you can select that money to go straight into the Money Market fund. From there, you can determine where to allocate that money based on what you think is the best option based on what’s going in the market. Since there are no limits on allocating new money, you can do this with each contribution or wait till a sizable amount is sitting in the money market (greater than $1250) and then make the allocation.




• 2. The IRS Has Expanded the Acceptable Expenses That Can Be Paid By the 529: Now, families can also use 529 money for computers and computer technology such as educational software and internet service for students living at home.

By taking advantage of these new provisions, you can more effectively move your money around to be better aligned or prepared for the market’s changes and you can spend the money on more qualified expenses.

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Ready to Reach you College Savings Goals? Get a Free Consultation from the Most Trusted and Risk Free Advisors in the Market – LotusGroup Advisors. With millions in under management and a Raving Fan Guarantee, You Can’t Go Wrong!

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LotusGroup Advisors is offering a FREE 30-MINUTE CONSULTATION with one of their expert Private Client Advisors to help you determine the best option for you.

• Email: info@lgadvisors.com
• Phone: (310) 808-8080

You can also SIGN UP FOR OUR NEWSLETTERS that are sent twice a quarter.

After knowing if there is a tax benefit, you want to know how good the investment options are. Each state will have a variety of options but I’ll tell you what they are in general.

1. Age-based Portfolios: The premise here is that the older your child is, the less risk should be taken because a significant decline in the value would mean you may have lost money right when you need to use it. Early on, the portfolio can take on more risk because the time horizon is far enough in the future. Sounds good but this option is terrible and is a guaranteed way to put yourself in a hole. Here’s why:

• First, the portfolio is being managed by a portfolio manager who doesn’t know you and is choosing to allocate your money into various mutual funds. This is called a fund-of-funds or better stated, fees-on-fees. You’re paying a manager his/her fees to invest in mutual funds managed by someone else who also charges fees.
• Second, the way the manager “reduces risk” is by allocating more money to bonds over time. The common misconception is that bonds are safer than stocks but that’s not true. Bond prices fluctuate based on how much someone is willing to pay in order to receive a dividend (which is like getting a paycheck).

Let me give you an example: Economics will tell you that if you can get a 6% dividend while interest rates are 1%, then your true return is 5%. If interest rates are 3% and the dividend is 6%, then your true return is 3%. Let me ask you, which of these would you pay more for? You of course would pay more to get 5% returns because it’s worth more. Well if you’re willing to pay more, that’s going to raise the price because a bunch of other people (known as The Market) are thinking the same as you. So the price of bonds goes up when interest rates are low. But what happens when interest rates are expected to increase? Well then the price of bonds are going to go down.

So if your child is 2 years away from going to college and interest rates were 0-0.25% (as they are today), you know the only place for interest rates to go is up and prices to go down. If you know the prices are going to go down, why would you invest in it? Just because it’s historically “safer”? Well who cares what it is historically, you care about not losing money today! In this scenario, being 2 years away from college with interest rates at all time lows, these are terrible investment options.

2. Risk-based Portfolios: The premise with these portfolios is that you can determine how much risk to take and change that risk tolerance when you want. Risk in this case is determined by the percent invested in stocks vs. bonds. The more that goes into stocks, the riskier. But as we discussed in the previous example, we know this is not true in the short-term depending on a number of factors. So while the “Aggressive” risk means being all in stocks with no bonds, that would actually be safer in a time when interest rates are so low as they are today. The good thing about this strategy is that you can set which risk level to take but the bad news is that this is still paying a fund-of-fund their fees-on-fees.

3. Individual Fund Options: Not all state plans offer this option but those that do, recognize the importance of letting you choose which funds to invest in. This option is the best for a host of reasons. You can determine exactly what to invest in and not have to pay someone else their fees to do so. This will save you thousands of dollars in fees. If you have a professional money manager, they can select the fund options for you and if they are paid as a percent of assets, then you know they are aligned with your interests because if the value goes up, they make more money and if the value goes down, they make less.

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Many states offer a Program Match where you are enticed to contribute and receive ‘free money’ in the form of a matched contribution. The reality is that the match is capped at a very small amount typically AND you have to qualify for this program based on your income.

Based on our research, those income limits are roughly the same as those who qualify for a lunch-assisted program in school. If your child doesn’t qualify for the lunch-assistance program or if you don’t know what that is, then the match will likely not be given to you. Of course, you’ll need to check the specifics of your state but that’s a general rule of thumb.

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1. Broker-sold plans vs. Direct plans: Simply stated, if you buy a plan through a broker for their “advice”, you pay an upfront fee which comes out of your investment returns. Furthermore, a broker will choose the investment options which pay ongoing fees so that they are always collecting money from you. AVOID BROKER SOLD PLANS! I’m telling you everything you need to know about a college savings plan so paying a broker is ridiculous, especially because their incentive is to make money off of you, regardless if you make or lose money.

2. Fund-of-fund fees: We’ve talked through this already so again, AVOID the Age-based and Risk-based portfolios.

3. Mutual fund fees by class: Each plan will have separate “classes” of mutual funds sometimes listed as “Class A”, “Class B”, etc. In the Virginia plan, for example, brokers will invest you in “Class C” shares because those pay the broker a 1% commission based on how much you’ve invested. That 1% commission you start in the hole -1% on your returns! Pay careful attention to the fees by class and select the ones with the lowest fee. Just that simple.

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Ready to Reach you College Savings Goals? Get a Free Consultation from the Most Trusted and Risk Free Advisors in the Market – LotusGroup Advisors. With millions in under management and a Raving Fan Guarantee, You Can’t Go Wrong!

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States “offer” a 529 plan as a benefit to its residents or to encourage investments by out-of-staters. That money carries a float meaning that the state can reinvest the money you’ve deposited because they won’t have to distribute it or give it back to you for years later. Making the distribution rules complicated gives the state all the more ability to hold onto your money.

So let’s break it down:

• You can only use the money in a 529 plan for college, not for high school or grades below.
• You can let anyone who is blood related use the money for college, including yourself or a spouse.
• If you take the money out, you will have to pay the taxes on the investment earnings AND a 10% penalty. That’s a steep penalty so you want to avoid paying this.
• If your child gets a scholarship, you can pull the money out of the 529 without a penalty but you will pay the taxes on the investment earnings.
• There are other exceptions but for the most part, the reason why you get a benefit from the 529 is being you’re willing to sign up for the terms that limit you from taking money out unless it’s for college.

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Ready to Reach you College Savings Goals? Get a Free Consultation from the Most Trusted and Risk Free Advisors in the Market – LotusGroup Advisors. With millions in under management and a Raving Fan Guarantee, You Can’t Go Wrong!

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One of the perks of a 529 plan is that you keep control of the account because it’s in your name. That means that at any time, you can determine who gets the money (as long as it’s a blood relative) and is used for college.

The Coverdell plan (another type of college savings plan) means you are giving the money to someone specifically and they can decide how to use the money and they get it all when they turn 30.

For many, retaining control means not entitling your child so that they continue to work hard to earn a college education. Also, if you ever came into an emergency and needed the money, you have control and can pull it out.

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Ready to Reach you College Savings Goals? Get a Free Consultation from the Most Trusted and Risk Free Advisors in the Market – LotusGroup Advisors. With millions in under management and a Raving Fan Guarantee, You Can’t Go Wrong!

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