Should I use a 529 plan to save for college?

Facts about 529 Plans

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Getting the Facts Straight about 529 Plans

As many of us are sending our children back to school this month, I thought it would be a good time to clear up some misconceptions about 529 savings plans. A 529 savings plan is an investment program offered by each state. It offers tax-free growth on money invested to pay for education expenses. Here are some common questions that arise regarding these savings plans:

Do I lose the money if my child doesn’t go to college? You will always have access access to the money in your 529 account. If withdrawn for anything other than qualified expenses, you will be subject to income taxes and a 10% penalty on the earnings. The account is funded with after-tax money, so the principal isn’t subject to taxes or the penalty. For example, let’s say you withdraw $10,000 from your plan and $8,000 is principal and $2,000 is earnings. If the money is used for anything other than an educational expense, $2000 is subject to taxes and penalty. If your child doesn’t need the money for education, you can also change the beneficiary to another family member or fund your own continuing education. There are no tax consequences or penalty to change the beneficiary.

What qualifies for an educational expense? A qualifying expense doesn’t have to be tuition or fees to a 4-year college. It could also be used for community college, graduate school, eligible vocational or trade schools, or adult continuing education classes. Funds can also be used for off campus housing, books and supplies, and computers. This year’s Tax Cuts and Jobs Act has expanded qualified expenses to distribute up to $10,000 per student to cover elementary or secondary schools.

What if my child gets a scholarship? You will be exempt from the 10% penalty on withdrawals up to the amount of the scholarship. You will still be subject to income taxes on the earnings. An exemption of the penalty is also applied if the beneficiary dies or becomes disabled, or decides to attend a U.S. Military Academy.

Do I have to use my home state’s plan or choose a school in my home state? You are not limited to using your home state’s plan, but there may be tax advantages. Some states offer a state tax deductions for 529 contributions if you make them to a plan in your home state. Your child can attend any eligible school regardless of where the plan is set up.

Will a 529 plan affect my child’s chances of receiving financial aid? Financial aid eligibility can vary depending on the institution, but it will have some impact. Since the account will be considered assets of the owner of the account and not the child, the impact will be small. An asset of a parent will reduce your eligibility by up to 5.64% of the value of the account. If the account were in the child’s name, it would be reduced by 20% of the value of the account. Also, the distributions will not be counted as income to your child for financial aid purposes.

With education expenses continuing to outpace inflation, a 529 plan can be a valuable tool to help cover the costs. A great resource for researching the different plans available is If you are still unsure, reach out and I can help you determine the best way to save for your family’s education expenses.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

 Securities offered through LPL Financial, Member of FINRA/SIPC and investment advice offered through Stratos Wealth Partners Ltd., a Registered Investment Advisor. Stratos Wealth Partners, Ltd. and Lob Planning Group are separate entities from LPL Financial.

Should I buy a variable annuity?

Should I Buy a Variable Annuity?

The One Article You Need to Read Before You Buy a Variable Annuity

There has already been a lot written about variable annuities and for good reason. It is hard to walk into a bank without hearing the argument that you are leaving money on the table given the low interest rate offered in savings accounts. This is a perfect segway to pitch a variable annuity. In my experience working with clients, these products are oversold to people that don’t fully understand them and ultimately don’t really need the features that they offer. So, let’s talk about what a variable annuity is, what some of the common benefits are, and most importantly some of the misconceptions and drawbacks of these products. Hopefully this will help you make an informed decision on whether a variable annuity is right for you.

In its most basic form an annuity is a contract between you and an insurance company where you give the insurance company money in a lump sum or over a specified period, and in return they agree to pay you an income stream (usually for life) once you decide to annuitize the contract. The main purpose of this product is longevity insurance. There are few guaranteed sources of income in retirement outside of Social Security or a pension plan. We are living longer lives and many retirees face the risk of outliving their retirement savings, so trading some of your savings now for a guaranteed income stream in retirement may not be a bad thing.

A variable annuity is a type of annuity contract that allows you to accumulate money in a subaccount where it is invested and grows on a tax-deferred basis. When you retire, the issuer will pay you a certain level of income based off the performance of the investments chosen. Essentially, you combined an investment product that grows tax-deferred until retirement with longevity insurance to mitigate the risk of outliving your money. Here are some other common features of a variable annuity.

Death Benefit- Most variable annuity contracts offer a death benefit to the beneficiary of the policy if the policyholder or annuitant were to die. The benefit is usually the amount paid into the annuity minus any withdrawals or the current contract value, whichever is higher. For an additional fee, some contracts offer an enhanced benefit that guarantees the death benefit will increase on the policy even if the market value does not.

Living Benefit- Contracts can offer benefits that the policyholder or annuitant can take advantage of while they are still living. For an additional fee, features can be added that guarantee a minimum level of income when you retire (Guaranteed Minimum Income Benefit), guarantee that you will at least get back the principal that you put in when you annuitize (Guaranteed Minimum Withdrawal Benefit), or guarantee that you will receive all your principal back after a certain holding period (usually 5 to 10 years) regardless if you annuitize the contract or not (Guaranteed Minimum Accumulation Benefit). Some of the newer products offer a benefit that allows you to take out money tax-free to pay long-term care costs.

So far so good, right? You get to participate in the performance of the stock market, have an income stream in retirement all while having the ability to leave a benefit to your beneficiaries and put in safeguards in the form of guaranteed riders to ensure a certain level of income and/or principal protection. Now let’s talk about some of the drawbacks or misconceptions of these products.

Everything comes at a cost…First, there is the basic insurance cost of an annuity which is paid through the Mortality and Expense Risk (M&E) Charge. There is also an administrative cost to service the policy, and potentially a surrender charge if you were to withdraw money from the contract before a stated surrender period which could be as long as 10 years. The subaccounts that are invested in also have their own underlying fees. As stated earlier, the enhanced death benefit or other living benefits are added to a policy for an additional fee. All in, just the M&E, administrative, and investment fees can easily pass 2% annually, and if optional benefits are added, the fee can be much higher.

Clearing up the tax benefits… Since you already receive tax-deferred treatment on contributions to a qualified (retirement) account, you only see an added tax benefit in a non-qualified (non-retirement) account. It’s also important to understand that the contribution is not made with pre-tax dollars. Therefore, there is no immediate tax benefit on the contribution. The only tax deferral benefits you are gaining is on the potential investment gains. But remember, in a variable annuity these gains will be taxed at the ordinary income rate when you withdraw or annuitize the money, not the long-term capital gain rate which is usually more favorable. Withdrawals prior to age 59 1/2 may be subject to a 10% IRS penalty, also. Another difference to a traditional investment is that if you leave an investment with a capital gain to your children, the IRS allows these beneficiaries a step-up in basis where they will receive the assets at the fair market value tax-free. Without additional estate planning, that is not the case with variable annuities. Non-spousal beneficiaries will be responsible to pay the tax on the gains from your original investment.

The word “Guarantee” is thrown around a lot but…Do these contracts really protect my money from a market downtown? Yes and no. These contracts usually guarantee a certain level of death benefit or income stream if you were to annuitize the contract in retirement. In most cases, they are not guaranteeing a certain market value in the account if you were to surrender the contract or needed to make a withdrawal. In this case, you will receive the market value at the time, minus potential tax penalties and any surrender fees if it is still in a surrender period. If the market is lower than where you invested the money, you will be subject to investment losses. As with all insurance products, all guarantees are based on the claims-paying ability of the issuing insurance company.

Other things to consider…The surrender period itself is a reason that a variable annuity might not be a good investment choice. During the surrender period, you could be penalized for withdrawals, so a variable annuity is not considered a liquid asset. Another drawback is that you are limited to the investment choices offered within the annuity. An investment account could offer you many more choices of mutual funds and ETFs, potentially at a lower investment cost.

I should also mention…It may seem that I am pretty hard on variable annuities in this article, but I should mention a couple of other benefits. Depending on your state, the value in these contracts may be protected from creditors. Also, the proceeds of a variable annuity avoid probate when they are paid to your beneficiary.

I hope this article clears up some of the misconceptions of this popular financial product. If you are unsure about the risks and costs associated with a specific variable annuity contract or if it is the right product given what you are looking to achieve, please reach out and I’d be happy to help.

Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Guarantees are based on the claims-paying ability of the issuer. Withdrawals made prior to age 59½ are subject to a 10-percent IRS penalty tax, and surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. The investment returns and principal value of the available subaccount portfolios will fluctuate, so the value of an investor’s unit, when redeemed, may be worth more or less than the original value. Optional features available may involve additional fees. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

Securities offered through LPL Financial, Member of FINRA/SIPC and investment advice offered through Stratos Wealth Partners Ltd., a Registered Investment Advisor. Stratos Wealth Partners, Ltd. and Lob Planning Group are separate entities from LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

What is an ETF?

How Well Do You Understand ETFs?

How Well Do You Understand ETFs?

Investors often look at exchange traded funds (ETFs) as interchangeable with common stock of public companies. They are both identified by 3 or 4 letter monikers and are accessible throughout the trading day. However, what investors must realize is that is where the similarities end. Before becoming a financial advisor, I spent 10 years as a market maker providing liquidity in ETFs. I focused on finding arbitrage opportunities, or inefficiencies, between an exchange traded fund and its underlying constituents. From my experience, I can tell you that in most cases an ETF is only as liquid as the market it represents. There can be added costs associated with the underlying assets that could affect the price paid for an ETF and its performance. For an investor, liquidity is never an issue until you actually need it.

The potential exception to this would be ETFs that track investment grade and high yield bond indexes in the U.S.. I provided liquidity during the financial crisis of 2008, and found more liquidity in the ETFs than in the underlying bonds. These products were widely used for purposes outside of long term investing. There was enough liquidity on both sides to provide a healthy market. Investors flocked to these products to find price discovery in some of the most turbulent days of the crisis. But in most cases, the underlying holdings drive the behavior of the ETF, not the other way around.

Index investing has been around for a while. The first exchange traded fund launched in the U.S. on the American Stock Exchange in 1993. I started my career on Wall Street in 2001 on the floor of the American Stock Exchange and worked close to the group of traders that made markets in many ETFs. With advances in algorithmic trading, this market has become more efficient. Trades occur in fractions of a second aided by computers, eliminating the need for a physical location to transact.

The reason for this efficiency is because these market makers are able to hedge their risk with an offsetting position in the components of the index. For example, if a market maker in an ETF sold shares in the market, they are able to offset that sale by purchasing shares of the individual stocks of the underlying companies. At the end of the day they aim to deliver the shares of the individual stocks that they purchased to the ETF issuer. In return, the issuer will deliver shares of the ETF to cover the sale they made during the day. This is called a creation, because more shares of the ETF are created to satisfy inflows by investors. If investors were selling the ETF, the market maker could deliver those shares to the issuing company in return for shares of common stock. This is called a redemption, since it would decrease the shares outstanding in the market.

But what happens if an ETF is holding assets that aren’t as liquid as the top 500 companies in the U.S.? ETFs often hold companies with a small market capitalization. Some have international holdings where the fund needs to hedge currencies that may not be very liquid. Those holdings may also have high transaction costs or local taxes associated with them. Fixed income ETFs often hold debt instruments that don’t trade very often. These issues can be amplified during periods of volatility. Sometimes an ETF will implement strategies that use derivatives like options or swaps to create leverage. ETFs can track commodities where futures contracts are the only way to gain access. Derivatives can also add unintended costs that are passed on to the investor through the price paid in the market. These factors can also affect the ongoing performance of the investment.

The universe of ETFs continues to grow, becoming increasingly complex. ETFs allow everyday investors access to areas of the market that once were only available to institutional investors. If you are unsure about the risks and costs associated with the underlying assets held by an ETF, speak with a professional.

An exchange-traded fund (ETF) is similar to a mutual fund that tracks a specific stock or bond index, such as the Barclays Capital 1-3 Year Treasury Index. ETFs trade on one of the major stock markets and can be bought and sold throughout the trading day, like a stock, at the current market price. And, like stock investing, ETF investing involves principal risk-the chance that you won’t get all the money back that you originally invested-market risk, underlying securities risk, and secondary market price.

*High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above, They generally should be part of a diversified portfolio for sophisticated investors.

Investors should consider the investment objectives, risks, charges and expenses of the Exchange Traded Fund carefully before investing. The prospectus and, if available, the summary prospectus contain this and other important information about the Exchange Traded Fund. You can obtain a prospectus and summary prospectus from your financial representative. Read carefully before investing.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. An investment in Exchange Traded Funds (ETF), structured as a mutual fund or unit investment trust, involves the risk of losing money and should be considered as part of an overall program, not a complete investment program. An investment in ETFs involves additional risks such as not diversified, price volatility, competitive industry pressure, international political and economic developments, possible trading halts, and index tracking errors.

Securities offered through LPL Financial, Member of FINRA/SIPC and investment advice offered through Stratos Wealth Partners Ltd., a Registered Investment Advisor. Stratos Wealth Partners, Ltd. and Lob Planning Group are separate entities from LPL Financial.