The Weekly Wealth of Knowledge is your download of this week's most important topics related to financial planning, the markets, and our community. September is back to school month at MONECO Advisors, where we discuss everything from financing school supplies to saving for college.
In this issue:
- Follow Up: State Laws and 529 Plans (2 min read)
- Market Performance: The Election (chart)
- September: Football and Market Volatility (2 min read)
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This week we have Managing Partner, John Rosenau, introducing our new content.
529 Plans and State Tax Deductibility
Last week we talked about how the new tax plan impacts your 529 savings. This week, we are following up with an article about how state laws can impact your ability to claim a deduction for your 529 contributions. After our article last week, several astute readers asked the same follow up question: does my state have to approve the changes to the federal law before I can use 529 money for K-12 private or parochial school? The short answer is no. Under the Supremacy Clause of the United States Constitution, federal laws supersede state laws. A 529 plan is a special provision of the Internal Revenue Code, which is federal tax law. Thus, no state (even CT!) can prevent you from using 529 money for K-12 Education.
State Tax Deduction
However, some states now give you a state tax deduction for contributing to a 529 plan. This deduction is state law, so your state can take it away if they disagree with the federal law changes. Some states, like Iowa, have specific language in their state tax laws that only allow for a tax deduction for 529 plan if they are used for college expenses. That is a key difference from the federal terminology “Qualified Education Expenses,” which was expanded in the 2017 Tax Cuts and Jobs Act. Here in Connecticut, our current state tax law does allow for the deduction to be used for K-12 education because the deduction is allowed for any 529 contributions that are later used for “qualified education expenses.” However, that does not mean it cannot be changed. Some legislatures are concerned that these rules are giving an unfair tax break to parents of private and parochial school children.
The bottom line, your state cannot prevent you from using the funds for K-12 education, and they cannot prevent the funds from accumulating tax free (the number one benefit of a 529 plan). However, they can prevent you from getting a state tax deduction on your contribution. While not ideal, even without a deduction, a 529 plan is still one of the most tax efficient ways to save for college. Don’t hesitate to reach out to learn more!
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Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
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Market Performance: The Election
Markets in general don't like change. We have recently been receiving a lot of questions about the election's impact on the market. To answer some of our reader's questions, we will be including a chart that graphically represents what has happened in past elections, leading up until election day. This week we have included a chart about how stocks do if a president is up for re-election. Click here to learn more. If you have any more questions, feel free to give us a call!
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September: Football and Market Volatility
Football is back, which means Summer is coming to a close, days will get shorter, and sweaters will soon be in play.
This year, there was no pre-season, so professional football started in September, which coincidentally, is a perennial month for stock market volatility.1
Football follows Major League Baseball, the National Basketball Association, and the National Hockey League, in which each organization started seasons (some abbreviated) in the past few months. Some colleges are playing fall sports, while others have postponed a part of their seasons.
This year, September is helping its reputation as a volatile month. After closing at a record high on September 2, the Standard & Poor’s 500 stock index fell sharply over the next three sessions. Concerns about COVID-19, Congress taking its time with further economic stimulus, and the upcoming elections seemed to unnerve investors.1,2,3
Most pro football stadiums are open to players and staff, but fans can expect to watch the games at home for much of the season. While games won’t be held inside a “bubble,” as with the NBA and NHL, NFL teams have changed travel and lodging protocols to distance or isolate players as much as possible, up to hiring two planes for each traveling team. 4 The point is that you have to be aware of what’s happening and make informed decisions.
So while your financial professional might not have any tips for your fantasy football team, they may be able to provide some guidance about how to stay focused on investment goals despite some short-term volatility.
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1. CNBC.com, August 31, 2020
2. The Wall Street Journal, September 3, 2020
3. The Wall Street Journal, September 8, 2020
4. Philadelphia Inquirer, September 9, 2020
Investing involves risks, and investment decisions should be based on your own goals, time horizon and tolerance for risk. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost.
The S&P 500 Composite Index is an unmanaged group of securities considered to be representative of the stock market in general. Past performance does not guarantee future results. Individuals cannot invest directly in an index.
The content is developed from sources believed to be providing accurate information.
The information in this material is not intended as tax or legal advice.
Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite, LLC, is not affiliated with the named representative, broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.