Active allocation: A world of ideas
Our Ivy Live panelists discuss the evolving investment landscape, including the recent U.S.-China trade escalation, and ideas to help guide allocation decisions.
There are many ways to invest for education goals, thus a great deal of choices to consider. The Ivy InvestEd℠ 529 Plan, a tax-advantaged education savings plan, is designed to help make preparing for the future convenient.
Ivy INVESTED 529 Plan Highlights
529 plans are tax-advantaged savings plans designed to encourage saving for future education costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies or educational institutions and are authorized by Section 529 of the Internal Revenue Code. 529 plans were originally designed to help prepare for future higher education costs by offering tax-free growth and tax-free withdrawals when funds are used toward qualified higher education expenses. However, the Tax Cuts & Jobs Act of 2017 expanded section 529 of the Internal Revenue Code. This change in tax code expanded the benefits of 529 plans to allow for tax-free distributions for tuition expenses at eligible public, private and religious educational institutions (K-12) up to $10,000 per student per tax year. Now 529 plan account owners can generally treat withdrawals for K–12 tuition as qualified education expenses, which means that earnings on withdrawals will not be subject to federal income tax or a 10% penalty that is applied to non-qualified withdrawals. State tax treatment of withdrawals for K–12 tuition is determined by the state(s) where the account owner files state income tax returns. With a relatively shorter time horizon and annual withdrawal limits, a different approach is recommended for 529 plan accounts that will be used to pay for pre-higher education expenses. A financial advisor can help you take advantage of potential tax savings by developing an effective 529 plan funding strategy for K–12 education costs.
When you open an Ivy InvestEd 529 Plan account, you are the “owner” of the account for the benefit of your selected beneficiary, such as your child, grandchild, niece or nephew. If your selected beneficiary chooses against using the funds, you can simply transfer the account to another direct family member of the beneficiary. As the owner you can also simply change the beneficiary if desire. Also, any U.S. citizen or resident, including your friends or relatives, can contribute to an Ivy InvestEd 529 Plan, an education savings account.
With the Ivy InvestEd 529 Plan, you can make contributions until a maximum balance of $453,000 for the 2017-2018 academic year ($476,000 for the 2018-2019 academic year, effective October 1, 2018) is reached for all program accounts per beneficiary. Plus, there are no income restrictions on the account owner, so you'll remain eligible to maintain your Ivy InvestEd 529 Plan account regardless of your income.
Earnings in your Ivy InvestEd 529 Plan account grow federal income tax-deferred. And all withdrawals are federal income tax-free if they are applied to qualified higher education expenses, such as tuition, fees, computers, room and board, and books. The change in tax code due to the Tax Cuts & Jobs Act of 2017 expanded the benefits of 529 plans to allow for tax-free distributions for tuition at public, private and/or religious institutions (K-12) up to $10,000 per student per tax year. Please note that state and local taxes may apply. States may offer some tax breaks such as a deduction for contributions or income exemption on withdrawals. This information is based on current tax laws, regulations, rules and interpretations, which are subject to change at any time. The availability of tax or other benefits may be conditioned on meeting certain requirements, such as residency or purpose for or timing of distributions. Taxes are deferred until withdrawal. The earnings portion of a non-qualified withdrawal is subject to a 10% penalty as well as federal and/or state taxes. Please consult your tax advisor regarding your individual circumstances.
For Arizona residents, qualified withdrawals for higher education expenses are Arizona income tax-free. Arizona taxpayers may invest in any state-sponsored 529 Plan and receive an Arizona adjusted gross income deduction for their contributions. Contributions up to $2,000 for a single individual ($4,000 if married, filing jointly) may be deducted per year. State tax benefits offered by Arizona to participants in its 529 Plan are available only to the taxpayers of Arizona. Arizona taxpayers should consult their tax advisors before making a contribution or withdrawal for K-12 tuition. Action is required by the Arizona State Legislature to extend favorable Arizona state tax treatment to withdrawals for K–12 tuition taken from this plan.
Especially important for grandparents or other relatives, contributions to an Ivy InvestEd 529 Plan account are excluded from the donor's taxable estate for federal tax purposes (assuming the donor is not the beneficiary). Thanks to the annual $15,000 gift tax exclusion ($30,000 in the case of a married couple), it is possible for grandparents, other relatives and friends to contribute substantial amounts to an account without incurring any gift tax. An election can be made (on the federal gift tax return) to spread up to $75,000 ($150,000 for married couples) to each beneficiary and spread the contribution over five years for gift tax purposes, as long as they do not make additional contributions to the same beneficiary during that five-year period. Please remember that if the contributor dies before the end of the five-year period, the portion of the gift allocable to the years remaining in the five-year period would be in the contributor's estate for federal estate tax purposes. Consult your CPA or other tax advisor regarding the impact of gift, estate, and other tax consequences.
You can open an Ivy InvestEd 529 Plan with as little as $250 per fund, and subsequent investments do not have a limit. You can also start with only $150 per fund and subsequently, a minimum of $50 per month, if you establish an automatic monthly investment or Automatic Investment Service (AIS). Additionally, if you establish an account through payroll deduction or salary deferral, there are no account minimums. Periodic investment programs like AIS cannot guarantee a profit or protect against investment loss in a declining market.
Before investing, investors should carefully consider the investment objectives, risks, charges and expenses of the Ivy InvestEd 529 Plan. This and other information is found in the InvestEd Portfolios prospectus, and the Ivy Funds prospectus, the Ivy InvestEd 529 Plan Program Overview, and the InvestEd 529 Plan Account Application. All of these items are available from these links or from a financial advisor. Please read the prospectus carefully before investing.
Before investing, non-residents or tax-payers of states other than Arizona 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 than those offered under the Ivy InvestEdSM 529 Plan. Please consult your tax advisor regarding your personal tax situation.
The Ivy InvestEd 529 Plan and shares of InvestEd Portfolios are offered by Waddell & Reed, Inc. as part of the Arizona Family College Savings Program Trust Fund, a 529 plan administered by the Arizona Commission for Postsecondary Education (the “Program”). Waddell & Reed, Inc. is one of multiple financial Institutions eligible to offer Investments under the Program. Accounts a not insured by the State of Arizona, the Trust, the Arizona Commission for Postsecondary Education, or any other governmental entity, Waddell & Reed, Inc., Ivy Distributors, Inc., or any affiliated or related party, and neither the principal deposited nor the Investment return is guaranteed by any of the referenced parties.
Past performance is not a guarantee of future results. Investments into a 529 plan, including the Ivy InvestEd 529 Plan, are not guaranteed, and all investments involve a certain degree of risk. The value of your Ivy InvestEd 529 Plan account will depend upon the performance of the portfolios in which your account is invested and will fluctuate. It is possible that the value of your account may be less than the amount you invested.
The information provided may include references to concepts that have legal, accounting and tax implications. It is not to be construed as legal, accounting or tax advice, and is provided as general information to assist in the understanding the issues discussed. Neither Waddell & Reed, Inc. nor Ivy Distributors, Inc., nor their associates offer tax, legal, or accounting advice. You may want to consult with your accountant or tax advisor to discuss your personal situation. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon and risk tolerance.