How the SECURE 2.0 Act Changed 529 Plans

Changes to 529 Plans in the SECURE 2.0 Act

The SECURE Act was initially passed by Congress at the end of 2019 and was intended to improve retirement savings opportunities. It was a big deal at the time and the most significant piece of retirement legislation since the 2006 Pension Protection Act.

Congress came together to pass SECURE 2.0 at the end of 2022 to build on this popular legislation and clarify some of its provisions.

The SECURE 2.0 Act includes 92 new provisions designed to promote savings, add incentives for businesses to offer retirement plans to their employees, and provide more overall flexibility to those saving for retirement.1

While increasing the starting age for required minimum distributions to 73 made the headlines, another important change for those saving for college was the addition of an option to move the unused portion of a 529 plan to a Roth IRA. But several criteria are involved in this process, and eligibility requirements must be met.

529 Basics

A 529 plan is an education savings account that allows parents, grandparents, other relatives, or friends to save money that will be used for a child's education.

These investment accounts became mainstream in the mid-1990s as a way for people to save for future education expenses when the assets would be used to pay for qualified education expenses for a designated beneficiary. Originally geared exclusively to pay for college, 529s have been expanded to pay for K –12, private and religious schools, trade schools, graduate programs, and some international institutions.

A 529 plan is a college savings plan that allows individuals to save for college on a tax-advantaged basis. The state tax treatment of 529 plans is only one factor to consider before committing to a savings plan. Also, consider the fees and expenses associated with a particular plan. Whether a state tax deduction is available will depend on your state of residence. State tax laws and treatment may vary. State tax laws may differ from federal tax laws. Earnings on non-qualified distributions will be subject to income tax and a 10% federal penalty tax.

529 Plans Explained

With a 529, after-tax contributions are invested in an account that can be used to pay for qualified education expenses. For example:

  • Housing—Campus housing expenses, including college room and board fees, can be paid through 529 distributions. Off-campus housing rentals qualify up to the cost of room and board on campus.

  • Books and Supplies—Paper, pens, and textbooks required by a specific course are qualified expenses. Schools set budget limits for books and supplies.

  • Needs and Services—Special needs equipment and services qualify for 529 distributions. Students using mobility equipment may be eligible for 529 distribution purchases. Depending on the circumstances, other modes of transportation may also apply.

Also, keep in mind that a 529 plan account holder may qualify for a state tax benefit, depending on where they live. More than 30 states and the District of Columbia offer some type of tax deductions or tax credits for 529 plan contributions.2 

Under the old rules, any leftover funds in a 529 plan after the designated student graduates or leaves college would be subject to a tax penalty and a withdrawal penalty if the remaining assets were liquidated for non-qualified expenses. However, the owner was allowed to transfer the 529 plan to another beneficiary, who could use it for their education expenses.3

SECURE 2.0 Act Changes for 529s

The new rule, which goes into effect in 2024, allows a 529 account holder to move money to a Roth IRA account under certain conditions. The main benefit of this new rule is that it removes some of the uncertainty regarding whether your kids will need the 529 money or whether you may have overfunded the account.

To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawals can also be taken under certain other circumstances, such as the owner's death. The original Roth IRA owner is not required to take minimum annual withdrawals.

Moving a 529 to a Roth IRA4

  • This part of the SECURE 2.0 Act becomes effective after December 31, 2023.

  • The 529 plan must have been open for a minimum of 15 years.

  • Changing beneficiaries to another student may restart the 15-year clock.

  • The owner of the Roth IRA must be the beneficiary of the 529 plan (meaning the student).

  • Any money moved from a 529 plan into a Roth IRA account will be subject to the Roth IRA annual contribution limits. The Roth IRA contribution limit in 2024 is scheduled to be $6,500, with an extra $1,000 allowed for individuals over age 50.

  • The lifetime limit is $35,000.

This article is for informational purposes only and is not a replacement for real-life advice. There are some additional criteria that go along with the updated rules, so it's best to speak to a financial or tax professional who has a detailed understanding of the state plan you are considering.

Paying for College

In 2021, the average cost for a year of college, including tuition, fees, room, board, and other expenses, was $35,551. That's about $142,000 for a four-year degree.

Footing the higher education bills of your children or grandchildren may seem daunting, but it can be within reach with the right type of preparation.

The SECURE 2.0 Act significantly changes 529 plans, offering more flexibility and choices for families saving for education. We have helped many clients create college savings strategies for their children and grandchildren. It's a specialty of ours, and it's one of the more rewarding aspects of the services we provide.

If you're considering a 529 plan, we may be able to help. Our professionals can provide more detailed information about 529 plans and offer guidance and insight into the state plan you are considering. We look forward to hearing from you.

1. AM.JPMorgan.com, January 3, 2023
2. SavingForCollege.com, May 11, 2023
3. SavingForCollege.com, April 19, 2023
4. SavingForCollege.com, December 24, 2022
5. BestColleges.com, April 11, 2023

SVB Collapse Threatens Climate Startups →

Great article demonstrating concentration risk. Silicon Valley Bank has done an incredible job of supporting companies doing some of the most important work on technology solutions for climate change. But that concentration risk, and SVB’s failure, puts a lot of these companies’ futures at risk if they lose an important capital partner. ☀️ 🌬️ ⚡️🏦🥵

#investing #finance #climatechange #SVB

https://www.nytimes.com/2023/03/12/climate/silicon-valley-bank-climate.html

Mar 2023 - It's All About That Rate

March 2023 Update

It's all about that Rate

The market's expectation of interest rates is anything but stable...it's all just noise right now

  

The January rally came to a halt in February, as inflation and economic data continued to come in better than expected and investors (finally?) began to appreciate that the Fed isn't in a hurry to cut interest rates. I know, I know - it makes no sense that a stubbornly good economy is somehow increasingly worrisome. But that's the fundamental driver of all the short-term market volatility of late - that, and how the Fed will react to it - and it's showing no signs of stopping. 

 In the meantime, bond yields are reaching their highest levels in years. The increase in the Federal Funds rate has raised bond yields generally, but the specific concerns over a potential recession and slowing earnings growth have specifically pushed shorter-term bonds to even more attractive levels, relatively. The now heavily inverted US Treasury curve makes 6-month bond investments seem like a no-brainer for anyone with a short time horizon, but locking in longer term bond returns at this point is a lot less compelling.

This broad rise in interest rates has also led to higher mortgage rates, especially as the chances of a 2023 Fed rate cut continue to wane. In February alone, the 30yr fixed mortgage spiked up from ~6% to over 7%.

Everything else:

The chart above is an interesting look at subprime delinquency rates by credit score...the trend since 2021 does not bode well for the lower end of the housing market.

Best,

Rohit

Is it really that bad?

 
 

If you're in a hurry, TLDR below.

Investors ended the third quarter with a near-record-level of pessimism, according to the AAII Investor Sentiment Survey. This doesn't come as a surprise given that September saw the market's worst monthly performance since April 2020, when the world was essentially imploding. Year to date, the S&P 500 is down ~25% and the Tech-heavy Nasdaq is down ~34%, with many smaller, formerly high-flying tech companies down 60-80%. And given the rapid rise in interest rates (the fastest relative rise in history), the usual safety of bonds has been completely thrown out, with the 30-yr Treasury bond down ~32% YTD. Anecdotally, I haven't felt this much market negativity since I was working remotely in September 2008, displaced during Hurricane Ike, and reading overnight that Merrill Lynch and Lehman Brothers were declaring a forced sale and bankruptcy, respectively. Maybe we've been numbed to any comparisons at this point...


 
 



The question is: are things really that bad right now?


If you were to look at an admittedly incomplete list of the issues with which we are currently dealing, you would authoritatively say, "Yes, the world is ending!"

  • Inflation is at multi-decade highs in the US and Europe, with Argentina & Turkey above 75%. While some commodities and prices have come down a bit, food inflation is still a major issue across the world. Most countries' central banks are still aggressively raising interest rates to fight inflation, which has barely started to take hold and can potentially put a halt to economic growth, as feared by the UN.

 
 

  • Putin's inhumane push to advance in Ukraine, despite meeting unforeseen challenges, is leaving western nations with little choice other than to increase their involvement. Putin has already threatened nuclear action multiple times, and a clear global division is forming.

  • European Energy - Putin's decision to shut off gas to Europe via shutdown and explosions of Nord Stream pipelines 1 & 2 have increased tensions and awareness of his willingness to act.

  • Political Instability - Italy, Brazil, Belarus, Turkey, Hungary, the US, and a seemingly endless list of countries are still dealing with right-wing populist leaders who are eschewing unity and reason in favor of division, ego, and falsehoods, and are destroying national resources, standard of living, and political allies along the way.

  • GBP - Inflation has hit the UK particularly hard given its reliance on Russian gas and Brexit-related economic issues. A sudden and irrational tax-cut proposal from newly elected PM Truss plummeted the currency even further before she was prompted to call off the proposal. But this hasn't cured the underlying problem.

  • Crypto - A lack of regulatory clarity around whether some cryptocurrencies should be considered securities (and therefore regulated by the SEC), along with a series of blockchain related failures and hacks, has weighed heavily on crypto prices. But the primary consideration is whether an "asset" without any inherent value can actually hold its value without the support of 0% interest rates.

  • Layoffs - Companies are continuing to hire cautiously and in many instances initiate aggressive layoffs, in preparation for decreased demand and a more difficult economic environment.

  • Corporate Earnings growth is expected to continue decreasing, potentially leading to actual earnings declines.

  • The US Dollar is up significantly against a pool of other currencies, which is helpful for Americans' purchasing power, but wildly destructive for foreign purchases that require USD (see most commodities that are priced in USD) as well as for American companies that generate significant revenue overseas.


The upshot to the list of doom is that:

  • Russia's war is not as immediately successful as Putin thought going in (and facing major setbacks), and he is draining resources and losing allies.

  • The Labor market overall in the US is quite resilient right now, and unemployement is still only at ~3.5%. It may be able to withstand further interest rate hikes without major damage to jobs.

  • Corporate Earnings remain fairly strong for now.

  • The US Dollar is likely closer to its peak value against most other currencies at this point, as the Fed is ~2/3 to it's goals regarding interest rate hikes. We could see this peak very early next year if current trends continue.


Given the seemingly unending list of issues looming over us, the real questions are:

  • Can the current system absorb all of these issues?

  • Are any of these issues going to get meaningfully worse or cause another unseen event?

    • Economies rarely just run out of steam; rather, it's generally an issue or a chain of events that spark a larger problem.

  • Is there anything to be optimistic about?

  • How will markets react in these possible situations?

  • How does your strategic financial plan change based on all of this?


Our stance hasn't changed over the past year. We still believe that we are going to experience a recession in the US in 2023, and likely a much worse recession elsewhere globally. While we don't believe this recession will be quite as bad as what we experienced in 2009 during the Great Financial Crisis, we think that it is irresponsible to assume that it will be a "mild" recession, and we expect that a "hard landing" could cause severe dislocations in various parts of the economy, especially for consumers already battling unsustainable financial situations involving low wages and sustained inflation.

  • For money that is needed in the next 1-2 years, we are still very conservative about ensuring that these funds are available and should not be put at risk.

    • Interest rates on cash and short-term bonds have become fairly attractive and will be increasingly so for the next year, finally providing an investment solution for short-term funds after a decade without any options.

 
 

  • For money that's not needed for 5+ years, equity valuations are becoming more attractive, and there is an opportunity to put new funds to work in public markets, likely followed by certain dislocated private market opportunities thereafter, with an expected lag.

    • We never try to time markets or wait for a peak or trough in valuations. Rather, we want to make informed, directionally accurate decisions. Buying long term holdings at increasingly more attractive prices within a tailored financial strategy is a proven strategy.

  • Though it's not required as a signal that the worst is behind us, equity markets haven't yet experienced the true spike in volatility that is typically seen during the most fearful times, as seen below. So we believe that it's likely that things could get worse from here.

 
 

  • The best days of market performance are often in the middle of a bear market and follow the worst days, so we want to make sure to continue communicating and discussing specific plans so that we avoid making any drastic, emotional decisions.

In the right neighborhood?

Whether regarding markets or financial planning, I often talk about directional accuracy as being the most important goal. The chart below really highlights this concept with respect to housing, specifically what national home prices should look like at any given mortgage rate. This isn’t used to make timing predictions (which is never our goal), but rather to understand the most likely outcomes for a particular scenario. Current home prices aren’t in line with historical norms, and they currently reflect a 30yr mortgage rate closer to 2.5%, while the actual current mortgage rate is closer to 7%. So either mortgage rates are ~180% higher than they should be, or home prices are ~150% higher than they should be…Which one do you think is more likely? (hint: The Fed may already know the answer).

Private Assets - Not as rosy as they look

The Chief of the Harvard endowment recently commented on the performance of university endowments generally, particularly noting how well they all seem to be doing despite the very challenging investment environment thus far in 2022. He is quick to note that the ones claiming the best performance numbers this year are correlated with higher allocations to private investments, which indicates not that these investments are actually doing well, but rather that the portfolio managers have yet to “mark their portfolios down.” This means that private assets are likely to see significant downwards adjustments to properly reflect how they have been affected by the rapidly changing macroeconomic environment. And it isn’t just endowments that own these assets, so it’s something to be watchful of across the board.

"Nobody knows nothing"

Great excerpt from a Barron’s article today regarding yesterday’s market activity. Oftentimes, markets seem to make no sense in the short-term, with things happening “As if by magic.” The key is to understand the fundamental drivers of the macro environment and your particular situation. and the to make well-informed decisions accordingly.

Buyers’ Remorse - Pandemic Housing

72% of recent homebuyers have regrets about their purchases. And while all homebuyers have some complaints about their homes (paint color, backsplashes, bathroom layout), this group is particularly regretful about two things:

  1. The amount they spent

  2. How quickly they had to make a decision

Any purchase should have sufficient thought put into it, commensurate with its cost. And with a home usually being your largest purchase, it’s no wonder that regret looms over those who didn’t take the prepare adequately beforehand. Some may think of a home purchase as a necessity or outside the scope of financial planning, but nothing could be further from the truth.

https://www.cnbc.com/2022/08/23/why-recent-homebuyers-have-regrets-about-their-purchases.html?

Rollercoaster Ride

Markets have recently rallied in relief on some better-than-expected data.¹ It was a bright spot in what has seemed like a relentless parade of bad news, as the Dow, S&P 500, and Nasdaq are still struggling to find their footing this year.¹

Is this the bottom of the bear market?

Maybe. Or maybe we’re somewhere in the middle with the loop-the-loops.

Rollercoaster markets make financial planning and behavioral strategies more important than ever


Let's be prepared for volatility to continue.

Folks tend to focus a lot on the numbers, but emotions and behaviors may matter even more. Knowing how to stick with a strategy during the loops and curves and uphills and downhills is a HUGE part of being a successful investor. And just like a rollercoaster, early planning is key to success (milk was a bad idea!).

Market bottoms don’t come with a signpost. There’s no one waving a flag saying, “the worst is over, it’s all uphill from here!”

Day to day moves don’t really give us an indication of where we’re headed over the next year. The end of a bear market looks an awful lot like the middle, and we don’t know if it’s the bottom until after we’re already past it. That’s why it’s so important to stick to a strategy and not let the euphoria of a rally or the fear of drops sway our decisions.

Investors who bail during the downturns and miss the ride back up tend to lose spectacularly.

Why? Because the best days and worst market days have historically clustered.²

We don’t know how long this bear market will last. We don’t know if a recession is coming, though it looks increasingly likely.

We do know this: you can’t enjoy the upside of the rollercoaster if you get off at the bottom.

Bottom line: it’s nice to get a reprieve from the selling pressure, but let’s be (emotionally and financially) prepared for a lot more volatility ahead.

__________________________________________________________________________________________________________________________________________________

1 - https://www.cnbc.com/2022/07/14/stock-market-futures-open-to-close-news.html

2 - https://www.cnbc.com/2022/03/09/you-may-miss-the-markets-best-days-if-you-sell-amid-high-volatility.html

The Financial Costs of Having Children

We all know the joys that children can bring…but what are the financial costs associated with having children? With Millennials and Gen Z approaching the (increasing) age at which they’re having families or beginning to have the conversation, it’s important to know how to plan for such a big decision.

It’s all about housing

Housing is a popular talking point these days, but it truly permeates so much of what is happening right now.

Housing shortages across the country have led to unaffordable housing prices and unreasonably high rental prices. While inflation relies heavily on oil/fuel and food prices, its biggest weight is the cost of housing at ~33%, which is most Americans’ single largest expense. The Fed’s desire to bring down inflation is firmly tied to our need to make housing more affordable and less restrictive, especially for those on the lower end of the income spectrum who have a much higher hurdle.

https://www.nytimes.com/2022/07/14/upshot/housing-shortage-us.html

Lotus AM 2022 Q2 Update

Well, that was fast



There’s no comforting way to state that this is broadly the worst start to the year for investment performance since 1970. The combination of high inflation, middling real growth, and rising interest rates has left major equity indices down 20-30% YTD, while bonds have also seen their worst performance in ~50yrs, down 10-15% YTD. It’s incredibly rare to see those two things happen at the same time, as they often have minimal correlation (or even negative correlation during times of uncertainty). There has been nowhere to hide, other than unique commodity prices that have shot up, mostly from the effects of Russia’s invasion into Ukraine in February. While it looks like US inflation has potentially peaked in the near term, there is no end in sight to the war in Ukraine, and commodity prices could remain generally elevated for some time; all of this has sparked the Federal Reserve to take a more aggressive stance on interest rate increases than they have in the past.
This is in stark contrast to their less concerned stance at the end of last year, and this rapid shift has cratered equity and bond prices. The Fed’s policy change potentially causing a “hard landing” (ie a major slowdown in economic growth in order to stem rabid inflation) instead of a “soft landing” (a gentle slowing of growth while successfully taming inflation) is what has scared markets so far this year. In opting to choose the freezer to fast-chill this carbonated beverage rather than the fridge, the concern is that it may now explode.

 
The good news is that a significant portion of the Fed’s projected interest rate increases have been priced into the market (roughly another 2%). That means that it’s possible that the majority of equity volatility is also past us.

The bad news is that there’s no real precedent for the Fed to follow in order to ensure a “soft landing”. Imagine for a minute that you’re playing in the National Egg Toss Championship (apparently this is a thing). You want to make sure to catch the egg so that it doesn't hit the ground (tame inflation with higher interest rates), but you also don’t want to catch it so firmly that it gets crushed in your hands (stem inflation so aggressively that it crashes the economy). Unfortunately, the Fed skipped field day, so they’re playing this game for the first time. And with egg prices up 11% from March 2021 to March 2022 (and your July 4th bbq up ~17%), they can’t really afford to break any eggs.

While it’s foolish to make bold predictions on what will definitely happen to the economy and markets, we need to be prepared for likely outcomes. These will directly affect student loan/mortgage rates, cash holdings, investment performance, portfolio allocation, withdrawal timing, and taxes (just to name a few).

We are bracing for a hard landing, where the Fed focuses intently on bringing down inflation at the risk of pumping the brakes too hard on the economy. This means a bigger, possibly longer slowdown, potentially increased volatility and asset depreciation, and likely disruptions in the labor market. This isn't guaranteed to happen, but it's certainly the biggest risk. As I mentioned in our blog last week, we are already witnessing a unique change in the labor market, where there is still a Covid-driven dearth of low-skill labor supply (coupled with strong/increasing demand), but simultaneously the beginnings of a slowdown for high-skill labor demand for fear of an impending economic slowdown. Covid cases with the newest BA.5 variant are on the rise, making it harder to find sufficient supply of the former. And Tech companies such as Tesla, Netflix, Unity Software, Coinbase Global, Stitch Fix, and Redfin have already announced job cuts, while Twitter and Intel are among a host of companies that have imposed hiring freezes (this is now widespread across the world of startups). Facebook parent Meta issued a chilling message to employees, saying that they face one of the “worst downturns that we’ve seen in recent history” that will require scaling back hiring and resources." CEO Mark Zuckerberg told employees that they would be expected to do more with fewer resources, which is a sentiment being echoed across corporate management.

While we're always looking for investment opportunities that can mitigate these risks, intimate knowledge of client cash needs and investment time horizons allows us to ride out turbulent markets like this and come out better on the other side, whenever that may be. There's no way to time markets, so we'll do everything else we can to prepare and prosper.

As always, we will remain vigilant for the undoubted volatility to come and continue to look for strategic opportunities when available. If you have any material changes to your situation that we haven't discussed yet, please reach out to schedule a call soon. Otherwise, we'll continue to shoulder the stress of short term volatility in the hopes that you can enjoy an amazing (albeit more expensive) rest of the summer!


Best,
Rohit

To hire, or to fire…that is the question

We are witnessing one of the strangest labor markets in history. Companies across various industries are (simultaneously) either struggling to hire sufficient staff from pandemic abnormalities/tight labor conditions or quickly looking to reduce headcount for fear of a recession or earnings slowdown. These two things are, of course, happening in two very different parts of the labor market, the divide being between “skilled” and “unskilled” labor. Macroeconomic predictions are all over the place, and many companies have no idea how to proceed; protect short-term earnings/survival with layoffs, or forge ahead with planning for future growth by overpaying for scarce new hires?

https://fortune.com/2022/06/29/michael-burry-tesla-layoffs-white-collar-workers-screwed-offshoring-the-big-short/

https://www.cnbc.com/2022/06/21/nobel-prize-economist-labor-market-worse-than-the-70s-as-strikes-hit-uk.html?__source=iosappshare%7Ccom.apple.UIKit.activity.Message