Missouri passed legislation on August 28, 2008, joining Arizona, Kansas, Maine and Pennsylvania, becoming the fifth state allowing taxpayers to deduct from their income contributions made to the Missouri Higher Education Savings Program (MO$T), or to any qualified 529 plan throughout the country. In addition, the act modifies the deduction provision to allow married taxpayers filing joint tax returns to deduct up to $16,000 of annual contributions from income. Previously the limit was $8,000 per taxpayer, and accounts had to be custodied in separate names. In addition, a recent IRS notice permitted two changes to the investment allocation of a 529 college tuition savings plan for 2009.
Given the leniency on deductions for contributions made to out-of-state plans, it makes sense to place children’s (and grandchildren’s) accounts in the state offering the best options. Our research efforts focused on three primary attributes:
- investment options
- cost (underlying expenses)
- reasonable access to account information
Illinois, Michigan, Missouri and Virginia were the best four options based on the criteria noted above. As we continued to peel away the layers of information available on each of these plans, we determined MO$T to be the preferred option. It is a very good plan when sold through the direct channel (i.e. no load), which is the way we open Moneta client’s accounts. We also like the fact that MO$T offers the convenience of online access to both client and advisor. It also has the capability of downloading into Moneta Group’s internal reporting system, making it easy to keep track of performance.
The investment managers offered by MO$T are Vanguard and American Century Investments, under the Upromise Investments, Inc. umbrella. In lieu of the age-based options offered, we recommend that clients secure portfolios for their children which follow a similar investment strategy to the one they follow for their personal investments. The goal is to achieve maximum long-term investment results, while maintaining a prudent amount of risk by diversifying among asset categories with low cross-correlations and taking into account whether the investments are in the accumulation or preservation mode.
The following chart shows model asset allocations using the investment options available. All four investment strategies listed below have a current expense ratio of 0.66 percent. Our recommendations depend on the age of the beneficiary and, of course, individual risk tolerance.
|Recommended Investment Selection||Age of Beneficiary|
|Vanguard Interest Accumulation Portfolio||0%||0%||20%||35%|
|Vanguard Conservative Income Portfolio||25%||34%||23%||22%|
|Vanguard Aggressive Growth Portfolio*||70%||61%||52%||38%|
|American Century Real Estate Portfolio||5%||5%||5%||5%|
* This portfolio is comprised of several Vanguard index funds representing various markets, including 25% international exposure.
Additional information is available at http://www.missourimost.org/. MO$T is a wonderful way to invest for future educational funding. Based on current tax law, you get a Missouri tax deduction, contributions compound on a tax-free basis, and withdrawals can be made tax free if used for allowed educational reasons. Your Moneta Group Family CFO can help with any questions or concerns you may have regarding college savings plans.