529 plan that allows emerging markets allocation?

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cato
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529 plan that allows emerging markets allocation?

Post by cato »

30 minutes with Search hasn't turned anything up...

So I'm wondering, does anyone know of a 529 plan that allows you to specify an allocation to emerging markets?

The best I've found so far are the plans that include the Vanguard Int. Index (some part of which is emerging) and the West Virginia 529 DFA all equity plan, which has 5% Emerging Markets Value.
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Post by avalpert »

If you are looking for a plan that has emerging markets as a stand alone option you can look a the Ishares 529 plan (I think it is Arkansas') though I believe you need to go through an advisor to buy it.
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Post by Tramper Al »

I don't think you are going to find a stand-alone EM index fund in the 529 world, at least not in Vanguard form or similar.

My VA VEST VG 529 International Index option is about 18% EM, I believe.

Is there some compelling reason to locate 100% EM in the 529 location? In index form, I think it can be quite efficient in a taxable location, and of course there are other advantages to that as well.

I might prefer the 529 location for EM compared to say TSM, but not by much, I think that's about it. Definitely, I'd be looking for 529 plan with stand-alone funds for REITs, TIPS, TBM, SCV, even MMF, before I tried to squeeze EMs into that space, and my allocation to EM is quite large compared to what I suspect most Bogleheads use.

If you do have a lot of equities on the tax-favored side, you are probably better off putting EM in places like VG IRAs or brokerage IRAs, where VWO or similar is available. Many 529s do have TSM and TISM, to help shift things around.
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Post by IL Int Med »

Utah's 529 has an option with 30% international equities, I believe
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Post by Tramper Al »

IL Int Med wrote:Utah's 529 has an option with 30% international equities, I believe
You understand that this is further from the OP's goal than what he/she has already found, yes?
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Post by IL Int Med »

Tramper Al wrote:
IL Int Med wrote:Utah's 529 has an option with 30% international equities, I believe
You understand that this is further from the OP's goal than what he/she has already found, yes?

I didn't read the OP closely enough, I guess. I didn't get the idea that the OP wanted more or less. The info I gave was just informational as I do use the Utah 529 (which is based mostly on Vanguard funds) and it has 2 100% equities options, 10% international and 30% international.
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Post by Kenster1 »

Yeah I haven't seen any plans either where you can specify your own EM allocation. Just about every 529 plan out there uses a diversified international fund where the allocations are set or you may be able to set your own international allocation (but not specifically just the EM piece).
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Post by cato »

Tramper Al wrote: Is there some compelling reason to locate 100% EM in the 529 location? In index form, I think it can be quite efficient in a taxable location, and of course there are other advantages to that as well.
My thinking is to put the high-risk/high-return stuff in an account where it can be withdrawn without taxes (versus e.g. an IRA). Overall, I want to set up my accounts thusly:

1) Taxable accounts: US & intl. developed indexes, qualified dividend paying stocks, and MLPs

2) IRAs: TIPs and other taxable-interest bearing investments

3) 529s (and Roth IRA if I get one): riskier investments with high gain potential, e.g. Emerging Markets, Intl. small cap/value.

Putting high-risk/high-return stocks in the 529 instead of the IRAs or taxable account makes sense, because you can withdraw with no taxes -- versus the traditional IRA, where you pay full income taxes on withdrawal, or the taxable accounts where you pay Cap Gains tax (which is likely to increase).

My children go to college in the next 11-16 years. So my timeframe is pretty long.
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Post by sewall »

cato wrote:
Tramper Al wrote: Is there some compelling reason to locate 100% EM in the 529 location? In index form, I think it can be quite efficient in a taxable location, and of course there are other advantages to that as well.
My thinking is to put the high-risk/high-return stuff in an account where it can be withdrawn without taxes (versus e.g. an IRA). Overall, I want to set up my accounts thusly:

1) Taxable accounts: US & intl. developed indexes, qualified dividend paying stocks, and MLPs

2) IRAs: TIPs and other taxable-interest bearing investments

3) 529s (and Roth IRA if I get one): riskier investments with high gain potential, e.g. Emerging Markets, Intl. small cap/value.

Putting high-risk/high-return stocks in the 529 instead of the IRAs or taxable account makes sense, because you can withdraw with no taxes -- versus the traditional IRA, where you pay full income taxes on withdrawal, or the taxable accounts where you pay Cap Gains tax (which is likely to increase).

My children go to college in the next 11-16 years. So my timeframe is pretty long.
Suppose, for argument's sake, you don't get a Roth and the above is all you have when your children enter college. What if, due to the high risk taken with your allocation, the 529 funds are insufficient? Then what do you do? Pay college costs out of taxable, taking a capital gains hit there.

I'm trying to get a handle on the risks here. The 529 is the only way to pay for college with tax-free funds. Isn't there some additional tax risk here by throwing it into a very volatile asset sub-class?

I could be missing something. Set me straight.
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Post by Tramper Al »

cato wrote:
Tramper Al wrote: Is there some compelling reason to locate 100% EM in the 529 location? In index form, I think it can be quite efficient in a taxable location, and of course there are other advantages to that as well.
My thinking is to put the high-risk/high-return stuff in an account where it can be withdrawn without taxes (versus e.g. an IRA).
Right, so that's an extremely pervasive fallacy. Let me suggest that when you put an asset in your Roth, you are merely allocating more $ to that asset than if you put the same number of $ in that asset in your tIRA. When you calculate your current AA, if you are not in the habit of considering that you do not own the entire tIRA, but rather only a (1-tax%) fraction of it, then this may seem puzzling. But that (1-tax%) part of the IRA that is actually yours also receives tax-free treatment. If you can get past that, then you will realize that there is no difference between these locations, in terms of tax treatment or the return/risk profile. By favoring Roth for EM, you have made an asset allocation decision, not a location decision.
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Post by Kenster1 »

Yeah I'm also confused about mixing up the retirement, taxable and 529 accounts as one?

If you're using all of your 529 assets to pay for college wouldn't you just treat as a stand-alone allocation? What are you going to do if in year 9, 10 and 11, Emerging Markets goes on a 3-year recession and crashes? You'll have a lot less money in your 529 tax-free for college.

Aren't you planning in the years before college to start moving to a more balanced allocation in the 529?
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Post by DSInvestor »

cato wrote:
Tramper Al wrote: Is there some compelling reason to locate 100% EM in the 529 location? In index form, I think it can be quite efficient in a taxable location, and of course there are other advantages to that as well.
My thinking is to put the high-risk/high-return stuff in an account where it can be withdrawn without taxes (versus e.g. an IRA). Overall, I want to set up my accounts thusly:

1) Taxable accounts: US & intl. developed indexes, qualified dividend paying stocks, and MLPs

2) IRAs: TIPs and other taxable-interest bearing investments

3) 529s (and Roth IRA if I get one): riskier investments with high gain potential, e.g. Emerging Markets, Intl. small cap/value.

Putting high-risk/high-return stocks in the 529 instead of the IRAs or taxable account makes sense, because you can withdraw with no taxes -- versus the traditional IRA, where you pay full income taxes on withdrawal, or the taxable accounts where you pay Cap Gains tax (which is likely to increase).

My children go to college in the next 11-16 years. So my timeframe is pretty long.
11-16 years isn't that long a time frame especially when you consider that the college spending happens in a very short time (4 yrs) and risk tolerance would need to be reduced dramatically in the coming years to make sure that money is available for those 4 yrs.
Rule of thumb:
money need in 5 yrs or less - MMF, CD, savings
money needed in 5-10 yrs - bonds
money needed in 10+ yrs - stocks.

Here's a thread where OP invested 350K REITS/VNQ in his 529 and suffered 50% losses.
http://www.bogleheads.org/forum/viewtop ... 1232284061
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Post by Tramper Al »

sewall wrote:Suppose, for argument's sake, you don't get a Roth and the above is all you have when your children enter college. What if, due to the high risk taken with your allocation, the 529 funds are insufficient? Then what do you do? Pay college costs out of taxable, taking a capital gains hit there.

I'm trying to get a handle on the risks here. The 529 is the only way to pay for college with tax-free funds. Isn't there some additional tax risk here by throwing it into a very volatile asset sub-class?

I could be missing something. Set me straight.
OK, so the idea of looking at the 529 as part of the overall portfolio, that requires a couple of assumptions I think. One is that you have some notion of what you will be willing and able to contribute towards college expenses, and two that you don't need to specify that amount today. In other words, you don't need to just make that 529 contribution, and say that's it, hell or high water.

In this case, we're not really talking about the college-specific allocation being 100% EM, as I understand the OP. He is just locating EM there because he feels there are good tax reasons to do so. He's wrong about that, but leave that aside for the moment. The underlying actual college fund AA is hopefully more diversified, and is located in various other accounts, including taxable.

There is the risk of course that the overall portfolio, over the next 15 years, will perform poorly enough that the anticipated amount of college expense support cannot be met, but that is a problem of overall performance, not 529 location.

Personally, in terms of location risk, I think it's actually the opposite. Say you put a potentially very high return asset (like REITs!), one that is actually predominantly for the retirement allocation, in the 529 space, and you have funded that space generously. It triples or quadruples or whatever, and your overall portfolio looks good. But now maybe you've got twice as much in the 529 location as can possibly be withdrawn tax-free for college + graduate school. I know, I know, we should all have such problems. But maybe that's one of the few assets that has done so well in that time frame, and you had it all in the 529.

As for eventual taxation of equity funds in the taxable location? 15 years isn't a real long time, but it is definitely long enough to see the benefit of efficient location. If you new you wanted to own $X in stocks and $X in bonds for 15 years, then sell all, I am confident that this would be long enough that you'd come out better by having the stocks in taxable and the bonds in the tax-free account.

In reality, though, I don't anticipate having to do a whole lot of "selling" in order to use equities in a taxable location to pay for college. Note, I still make the 529 withdrawals of course, you get that part right? Anyway, every year, even my most tax-friendly ETFs send me 1.5%-2.5% in distributions, so over a several year period, it is simple enough to direct these toward cash/bond allocations without incurring any additional taxes. Obviously the AA for my 6 month old's college fund will undergo a gradual transition over time, from predominantly equities now to more bonds and cash as those tuition bills get closer.
Last edited by Tramper Al on Thu Feb 26, 2009 1:16 pm, edited 6 times in total.
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Post by Tramper Al »

DSInvestor wrote:11-16 years isn't that long a time frame especially when you consider that the college spending happens in a very short time (4 yrs) and risk tolerance would need to be reduced dramatically in the coming years to make sure that money is available for those 4 yrs.
Rule of thumb:
money need in 5 yrs or less - MMF, CD, savings
money needed in 5-10 yrs - bonds
money needed in 10+ yrs - stocks.

Here's a thread where OP invested 350K REITS/VNQ in his 529 and suffered 50% losses.
http://www.bogleheads.org/forum/viewtop ... 1232284061
Right, well I totally agree that you must consider the time frame for that college expense AA.

But the thread you've linked to is just another "529 as whole portfolio" investor. His REITs weren't specifically allocated for college, they are part of his overall portfolio that he simply located there. Invest $350K or so in REITs per your AA in 2009-09, and you will have lost money. The assumption is that he'd have made that $350K REIT allocation in some other account anyway. It doesn't really matter where, the effect on the overall portfolio is the same. Except maybe you wish you could TLH!

And 529s aren't as constrained as say retirement plans, in terms of contributions. Space in a 529 due to losses can be replaced. The space, mind you.

We actually have had the opposite (to the linked investor) situation happen. During the great crash of 2008-09, all of our 529s have been 100% TIPS. So they have done fine. But the bulk of the kid's college AA is in equities, located in taxable! So, effectively, we now have a higher percentage of our overall portfolio in the 529 location.
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Post by DSInvestor »

Tramper Al wrote:
DSInvestor wrote:11-16 years isn't that long a time frame especially when you consider that the college spending happens in a very short time (4 yrs) and risk tolerance would need to be reduced dramatically in the coming years to make sure that money is available for those 4 yrs.
Rule of thumb:
money need in 5 yrs or less - MMF, CD, savings
money needed in 5-10 yrs - bonds
money needed in 10+ yrs - stocks.

Here's a thread where OP invested 350K REITS/VNQ in his 529 and suffered 50% losses.
http://www.bogleheads.org/forum/viewtop ... 1232284061
Right, well I totally agree that you must consider the time frame for that college expense AA.

But the thread you've linked to is just another "529 as whole portfolio" investor. His REITs weren't specifically allocated for college, they are part of his overall portfolio that he simply located there. Invest $350K or so in REITs per your AA in 2009-09, and you will have lost money. The assumption is that he'd have made that $350K REIT allocation in some other account anyway. It doesn't really matter where, the effect on the overall portfolio is the same. Except maybe you wish you could TLH!

And 529s aren't as constrained as say retirement plans, in terms of contributions. Space in a 529 due to losses can be replaced. The space, mind you.

We actually have had the opposite (to the linked investor) situation happen. During the great crash of 2008-09, all of our 529s have been 100% TIPS. So they have done fine. But the bulk of the kid's college AA is in equities, located in taxable! So, effectively, we now have a higher percentage of our overall portfolio in the 529 location.
Yes, I realize that the linked post was for an investor who considered REIT in 529 as part of his overall AA, but if you read linked post again, he wonders if the remaining 200K in the 529 would be sufficient for 2 and 6yr old.
One year ago I made the decision to invest my kids' entire 529 plans in REITS (the virginia 529 program allows for 100% VNQ). I bought about $350K of VNQ in these plans and considered it as the REIT component of my AA. The objective was to place a highly tax inefficient instrument in the most tax efficient plan possible. Naturally, REITS have had a disastrous year and the portfolio has lost about 50%. Fortunately, my kids are 2 and 6 years old and are not in immediate need of the money. However, I would welcome some advice regarding this approach:

1. Was the original thinking correct to place the most tax inefficient instrument in a 529?
2. Is it reasonable to think of the 529's as just part of my AA as a whole? I think this has been covered before on the forum and the conclusion was that it was reasonable.
3. Should I perhaps have invested TIPS, BND or some other form of bonds in the 529 instead? My feeling at the time was that since I had so much time I anticipated that REITS over the long term would appreciate more than bonds.
4. Is it plausible that ultimately REITS will do so badly in the long term that the kids won't really have sufficient funds?
5. Does it seem likely that the remaining $200K in these two funds will suffice for a 2 and 6 year old? Or should I supplement this further (I have not maxed out yet on what I can put in)? When I put in the initial $350K for the two of them I thought that I was "done" with my college obligation for them. Am I not quite done?

Thanks in advance for any advice.
bold=my emphasis.

It seems like that poster (ilan1h) was unsure of exact intention of his 350K investment - was it part of the big AA or was it college only AA? It's also apparent that he thought REITs would outperform bonds. No matter what the intentions, I think it's important to focus on attaining a sufficient return rather than maximum return. Sufficient return may involve far less risk and offer a much higher probability of success, especially for investors with a reasonably substantial assets.
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Post by mymer »

Al,
Which 529 plan did you choose for your TIPS?
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Post by mymer »

Al,
You also mentioned that you were using your children's social security numbers for $5000 here or there. Are you purchasing I bonds? Do you hold them in a treasury direct gift box?
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Post by Tramper Al »

mymer wrote:Al,
Which 529 plan did you choose for your TIPS?
We use the Virginia VEST plan. It has REITs and TIPS, and I believe is or was about the only one offering both.

I bought paper I-bonds with each of our children in 2008.
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Post by xerty24 »

Very nice reply Al. I just wanted to add that in addition to the risk of earning too much in your 529 account (possibly leading to penalties on the withdrawn earnings), there's also the lack of TLH which is a valuable ability especially when investing in volatile assets. In fact, I would think that EM equities being very volatile have a bigger value of their "TLH option" than almost anything and hence almost certainly want to be in taxable. You can get some sort of limited TLH if you lose lots of money in your 529, but you have to withdraw the balance and take the loss as a misc itemized deduction which isn't nearly as good. These were my reasons for holding EM in taxable.
Tramper Al wrote:OK, so the idea of looking at the 529 as part of the overall portfolio, that requires a couple of assumptions I think. One is that you have some notion of what you will be willing and able to contribute towards college expenses, and two that you don't need to specify that amount today. In other words, you don't need to just make that 529 contribution, and say that's it, hell or high water.

In this case, we're not really talking about the college-specific allocation being 100% EM, as I understand the OP. He is just locating EM there because he feels there are good tax reasons to do so. He's wrong about that, but leave that aside for the moment. The underlying actual college fund AA is hopefully more diversified, and is located in various other accounts, including taxable.

There is the risk of course that the overall portfolio, over the next 15 years, will perform poorly enough that the anticipated amount of college expense support cannot be met, but that is a problem of overall performance, not 529 location.

Personally, in terms of location risk, I think it's actually the opposite. Say you put a potentially very high return asset (like REITs!), one that is actually predominantly for the retirement allocation, in the 529 space, and you have funded that space generously. It triples or quadruples or whatever, and your overall portfolio looks good. But now maybe you've got twice as much in the 529 location as can possibly be withdrawn tax-free for college + graduate school. I know, I know, we should all have such problems. But maybe that's one of the few assets that has done so well in that time frame, and you had it all in the 529.

As for eventual taxation of equity funds in the taxable location? 15 years isn't a real long time, but it is definitely long enough to see the benefit of efficient location. If you new you wanted to own $X in stocks and $X in bonds for 15 years, then sell all, I am confident that this would be long enough that you'd come out better by having the stocks in taxable and the bonds in the tax-free account.

In reality, though, I don't anticipate having to do a whole lot of "selling" in order to use equities in a taxable location to pay for college. Note, I still make the 529 withdrawals of course, you get that part right? Anyway, every year, even my most tax-friendly ETFs send me 1.5%-2.5% in distributions, so over a several year period, it is simple enough to direct these toward cash/bond allocations without incurring any additional taxes. Obviously the AA for my 6 month old's college fund will undergo a gradual transition over time, from predominantly equities now to more bonds and cash as those tuition bills get closer.
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Post by mymer »

Thanks so much, Al. I am going with VA VEST too, for TIPS. Do you buy I-bonds for the kids in there own name , as co-owners, or as beneficiaries? I understand you can purchase more than the 10,000 dollar limit by using the gift box. I have only one kid, so the limits and my shortage of social security numbers are what I'm considering. Thanks so much for your advise.
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Post by mymer »

Thanks so much, Al. I am going with VA VEST too, for TIPS. Do you buy I-bonds for the kids in there own name , as co-owners, or as beneficiaries? I understand you can purchase more than the 10,000 dollar limit by using the gift box. I have only one kid, so the limits and my shortage of social security numbers are what I'm considering. Thanks so much for your advise.
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Post by Tramper Al »

mymer wrote:Thanks so much, Al. I am going with VA VEST too, for TIPS. Do you buy I-bonds for the kids in there own name , as co-owners, or as beneficiaries?
Right, so my understanding is that the only way an I-Bond might escape taxation at redemption is when a parent is the owner, and the proceeds are used for the beneficiary's qualified educational expense AND the parents' income is below the phase out. We are way above that threshold, but who knows what the future holds. The first I-Bond I buy each year with my own SSN, that one has a child as beneficiary. Once I have used up both parental SSNs, using paper and TD, the last I-Bonds I can buy are with child as co-owner under their SSNs. These would not be eligible for that tax break, as I understand it.
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Post by Random Musings »

One option for the OP is to allocate that portion of EM to their tax-deferred vehicles (or perhaps even taxable). Not a perfect world - uses the assumption that future expenditures is spent from all savings (one big "bucket" of which 529 plan is a component).

RM
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