We've scoured the internet so that you don't have to. Consider this our monthly roundup of relevant news articles to support your pursuit of prosperity.
April is Financial Literacy month in the United States. In 2003, Congress finally supported the idea of financial literacy month. Because it was officially recognized by Congress, a big push was made from various non-profits and government agencies (National Financial Educators Council, Financial Literacy and Education Commission, and National Endowment for Financial Education) generated tools and courses for families to utilize to improve your financial situation.
Investment markets have reared their ugly head since early February. After a time of prolonged quiet in the markets, investors are back to reacting to the news of the day. The week of March 18th yielded good economic news, a positive outlook by the Federal Reserve, yet a 5.9% retreat in the S&P 500 due to the talk of tariffs. Let’s look at an example to see if we should truly fear the day-to-day, or if we can achieve success even when we truly do have economic fears to be concerned about.
There’s a new scam going around we want you to be aware of. If you receive a call from someone who says they are from the IRS, and you need to pay a tax bill with a credit card immediately or go to jail, it’s a scam! It may sound obvious to you, but unfortunately, thousands of people have lost millions of dollars and their personal information to tax scams.
As always, don’t give any personal information on the phone. Be aware that calls of this nature are not legitimate, no matter how official they sound. The IRS will never call you about taxes due; they send official notices only by U.S. mail. Additionally, they will never threaten you with law enforcement or demand payment without the opportunity to ask questions or appeal the amount owed.
After reaching all-time highs on January 26, 2018, the Dow Jones Industrial Average and the S&P 500 went into a two-week slide that saw both stock indexes drop by more than 10%, a decline that is typically considered a market correction.1
Analysts have been saying for several years that the long, booming bull market was overvalued and due for a correction, so the drop was not a surprise in the big picture.2 And even after the 10% plunge, the Dow was up 19% over the previous 12 months, and the S&P 500 was up 12.5%.3
It's natural to be concerned about this kind of shift, but more important to maintain perspective and focus on your long-term goals. It may be helpful to consider some of the reasons behind the surge of market volatility.
Once again, the economic metrics we follow indicate growth is strong around the world. The ultra-loose monetary policies that were implemented due to the financial crises a decade ago have led to an expanding global economy resulting in many countries continuing to see strong GDP growth. Labor markets are solid, global trade is healthy and commodity prices are higher. All of which have led to the best global growth in over seven years.
The U.S. economy is benefiting from a job market that continues to improve. Unemployment is at a historical low of 4.1% and wages are slowly rising – and should continue to do so at an accelerating rate in 2018. Housing is often the greatest indicator of how the consumer feels about the economy. Construction continues to be strong as existing home sales hit an annual rate of 5.81 million homes in November 2017, the highest level since 2006. This is still well below the levels seen in 2005 during the construction boom times. And, U.S. GDP has been revised upward to 3.2% for 2018.
If you haven’t been paying close attention to investment markets, you might be now. While the investment world spent the year 2017 plodding steadily upward with relatively low volatility, the New Year has brought with it over-exuberance in January followed by mild panic in February. Needless to say, markets have definitely caught our attention over the last few days.
Our call to “stay the course” couldn’t be stronger. We have advised folks to expect a market correction for over a year now. Markets will generally experience a 5-10% correction in any given year, yet we actually closed in on a 24 month run without one. It’s been long overdue and actually welcomed after the feverish pace at which stocks were purchased in the month of January. While the economy continues to be on solid footing, no significant changes spurred on January’s buy excitement, and nor did they contribute to the sell-off we have seen the last 2 trading days.
In December 2017, the Tax Cuts and Jobs Act, a sweeping $1.5 trillion tax-cut package, became law. College students and their parents dodged a major bullet with the legislation, as initial drafts of the bill included the elimination of Coverdell Education Savings Accounts, the Lifetime Learning Credit, and the student loan interest deduction. Also on the table in early drafts of the bill was the taxation of tuition waivers, which are used primarily by graduate students and employees of higher-education institutions. In the end, none of these provisions made it into the final legislation. What did make the final cut was the expanded use of 529 plans.
Under the new law, the definition of a 529 plan "qualified education expense" has been expanded to include K-12 expenses. Starting in 2018, annual withdrawals of up to $10,000 per student can be made from a 529 college savings plan account for tuition expenses in connection with enrollment at an elementary or secondary public, private, or religious school (excluding home schooling). Such withdrawals are now tax-free at the federal level.
At the state level, roughly 20 states and the District of Columbia automatically update their state legislation to align with federal 529 legislation, but the remaining states will need to take legislative action to include K-12 expenses as a qualified education expense and, if applicable, extend other state tax benefits to K-12 expenses; for example a deduction for K-12 contributions.
529 account owners who are interested in making K-12 contributions or withdrawals should understand their state's rules regarding how K-12 funds will be treated for tax purposes. In addition, account owners should check with the 529 plan administrator to determine whether a K-12 withdrawal request should be made payable to the account owner, the beneficiary, or the K-12 institution. It's likely that 529 plans will further refine their rules to accommodate the K-12 expansion and communicate these rules to existing account owners.
The expansion of 529 plans to allow K-12 expenses will likely impact Coverdell Education Savings Accounts (ESAs). Coverdell ESAs let families save up to $2,000 per year tax-free for K-12 and college expenses. Up until now, they were the only game in town for tax-advantaged K-12 savings. Now the use of Coverdell ESAs may decline as parents are likely to prefer the much higher lifetime contribution limits of 529 plans — generally $350,000 and up — compared to the relatively paltry $2,000 annual contribution limit for Coverdell accounts.
Coverdell ESAs do have one important advantage over 529 plans, though — investment flexibility. Coverdell owners have a lot of flexibility in terms of what investments they hold in their account, and they may generally change investments as often as they wish. By contrast, 529 account owners can invest only in the investment portfolios offered by the plan, and they can exchange their existing plan investments for new plan investments only twice per year.
A list of 529 plans offered, by state, and a comparison tool are available at collegesavings.org.
The new tax legislation also allows 529 account owners to roll over (transfer) funds from a 529 plan to an ABLE plan without federal tax consequences. This ability to transfer funds will expire at the end of 2025 unless a future Congress acts to extend the law.
An ABLE plan is a tax-advantaged account that can be used to save for disability-related expenses for individuals who become blind or disabled before age 26. Like 529 plans, ABLE plans allow funds to accumulate tax deferred, and withdrawals are tax-free when used to pay the beneficiary's qualified disability expenses, which may include (but are not limited to) housing, transportation, health care and related services, personal assistance, and employment training and support.
ABLE accounts have annual and lifetime contribution limits. Contributions from all donors combined during the year cannot exceed the annual gift tax exclusion ($15,000 in 2018). As for lifetime limits, each state sets its own limit, which is also the state's maximum for its 529 college savings plan contributions. In most states, this limit is at least $350,000.
A list of ABLE plans offered, by state, and a comparison tool are available at ablenrc.org.
A total of 35 states and the District of Columbia offer a full or partial state income tax deduction for contributions to a 529 plan (however, most restrict the deduction to contributions made to the in-state plan only). California, Delaware, Hawaii, Kentucky, New Jersey, and North Carolina do not offer a state income tax deduction; and Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming do not have a state income tax.
Content provided by: Broadridge Financial Solutions, Inc.
January 2018
