Our Thoughts on Oregon’s 529 Plan

Periodically, we are asked about options for saving for college for one’s kids or grandchildren.  In 1996, the federal government allowed states to set up Section 529 college savings plans.  In addition, there is the option to use a Coverdell educational savings accounts, formerly known as an educational IRA.  In this blog post, though, we will narrow our focus to the question, “if I’m an Oregon resident and I plan on investing solely in a U.S. index fund, should I use Oregon’s 529 or some other state’s 529 plan?”  The answer, in short, is use Oregon’s 529.  The long answer is a function of the state tax benefit you receive by contributing to an Oregon 529 versus the lower fees structure of some other 529 programs.1

Oregon’s 529 U.S. stock index fund has a current expense ratio of 0.32% while New York, due partially to its size, has a rock-bottom expense ratio, at least as 529 plans go, of 0.17%.  New York uses the Vanguard Total Stock Market Index while Oregon uses the TIAA-CREF Equity Index Fund.  We wouldn’t expect much difference in these two funds over long periods of time.  We assumed a marginal tax rate of 10.8% which is relevant for a couple with taxable income over $250,000.  The maximum contribution deductible for Oregon state tax purposes is currently $4,455; this amount is adjusted for inflation going forward.  We assumed our couple contributes this amount to capture the tax deduction.  We also assumed our couple turns around and contributes the amount saved in taxes to their child’s 529 plan, but receive, of course, no tax benefit for this.  The eventual market return won’t change the conclusion, but we assumed 5%.  Below is a graph of the results of this analysis.  Using Oregon’s direct 529, the couple saves over $10,000 in taxes which, along with compounding (even in a higher cost 529), turns in to a $13,000 advantage to using an in-state 529.  Even with a lower marginal tax rate, an Oregon taxpayer still comes out ahead using the Oregon 529.

Oregon 529

One strategy that can be employed is contribute the amount necessary to get the maximum Oregon tax benefit to the Oregon 529 plan and contribute amounts over that, if any, to one of the lower cost plans; you are neither restricted to using your state’s plan nor having only one account for your child.

Whatever plan you decide to use, the sooner you start, the more you are likely to accumulate for college education expenses due to potential compounding.  If you want more information, you may want to check out these resources:

 

The site below is a comprehensive site dedicated to all the ways to save for college:

http://www.savingforcollege.com/

Morningstar recently came out with their 2013 ranking of 529 plans.  You can check that out with the link below:

http://news.morningstar.com/articlenet/article.aspx?id=615151

Below is the link to Oregon’s 529 direct site where you can learn more about the plan and open an account online:

https://www.oregoncollegesavings.com/home.shtml

 

1We only considered going directly to Oregon 529 as compared to using a broker-sold Oregon 529 by MFS Investment Management.  The additional fees charged by MFS are likely not worth paying.  Each state has their own 529 program with different features, investment options, and fees.  Fees and investment options are subject to change.  Consult your tax advisor as your unique circumstances may change the assumptions and conclusions above.

We Are Moving Our Office Monday Nov. 25th

Northwest Investment Counselors has some exciting changes taking place. We are growing as a firm and have added Michelle Castano Garcia as a principal and relationship manager. We are also moving our office. Starting November 26th our new address is:

Northwest Investment Counselors, LLC
5885 Meadows Road – Suite 860
Lake Oswego, OR 97035-8650
 

While our space is being built-out we will temporarily be located on the third floor of our new building. We do not anticipate any interruptions in our ability to serve our clients but we do ask for your patience if you get voicemail occasionally during this time. Our phone numbers and email addresses will remain the same.  They are listed below for your convenience:

Main: 503.607.0032
Toll Free: 800.685.7884
Fax: 503.905.2995
 
Mark E. Scarlett, CFA
503.607.0041
mscarlett@nwic.net
 
Matthew J.N. Roehr, CFA
503.607.0044
mroehr@nwic.net
 
John S. Woolley
503.607.0042
jwoolley@nwic.net
 
Christel P. Turkiewicz, CRPC
503.607.0045
cturkiewicz@nwic.net
 
Michelle C. Garcia
503.675.3840
mgarcia@nwic.net
 
Cheyne B. Sorensen
503.607.0032
csorensen@nwic.net

 

We look forward to these positive changes and what the future holds for our firm. As always, we thank you for your business.

November Conerly Charts

View the latest charts and comments on the U.S., Oregon, and Washington economies from Dr. Conerly of Conerly Consulting.

We are pleased to re-post Dr. Conerly’s November charts for our clients. Please see his site for more data and comments: www.conerlyconsulting.com. Click the images below for larger versions.

2013_11_1 2013_11_2 2013_11_3

Retirement Plan Contribution Limits for 2014

The IRS announced, on October 31, 2013, the retirement plan contribution limits for the 2014 tax year.  The limits have pretty much stayed the same, but let’s review some of the most widely used here.

The Roth IRA limit is $5,500 with eligibility phase outs for single filers with modified adjusted gross income of $114,000-$129,000 and married couples filing jointly of $181,000-$191,000. The catch-up contribution limit is $1,000 for those who are 50 or older in calendar 2014.

The traditional IRA limit is $5,500 with deductibility phase out for single filers with modified adjusted gross income of $60,000-$70,000 and covered by an employer retirement plan.  The phase out for married couples filing jointly and the contributor is covered by an employer plan begins at $181,000.  The catch-up contribution limit is $5,500 for those who are 50 or older in calendar 2014.

For a Simplified Employee Pension (SEP) IRA, the company may contribute up to 25% of compensation or $52,000, whichever is less.  This amount is an increase from 2013.  The compensation limit is 20% for sole proprietors.

Salary deferral for SIMPLE IRA’s can be up to $12,000.  There is an employer match limit of 3%.  The catch-up contribution limit is $2,500 for those who are 50 or older in calendar 2014.

The 401(k) employee elective salary deferral limit will be $17,500 with a catch-up contribution limit of $5,500 for those who are 50 or older in calendar 2014.

The rules can be complex so we encourage you to consult your tax advisor. Below is a link to the IRS announcement where you can find more details.

http://www.irs.gov/Retirement-Plans/COLA-Increases-for-Dollar-Limitations-on-Benefits-and-Contributions

Please join us in welcoming Michelle Garcia to the NWIC team

MCGPlease join us in welcoming Michelle Castano Garcia to Northwest Investment Counselors.  We are very excited to be working with Michelle.  Michelle is a 26-year industry veteran with significant experience in trust and estate planning, financial planning and investment management.

Michelle joins us as a Principal and is responsible for advising client relationships and is actively working on developing new business opportunities with existing clients and external business partners.  You can reach Michelle at 503.675.3840 or mgarcia@nwic.net.

 

Current Long-Term Stock Market Expectations

You might have missed, with all of the political theatre and pundits chattering about the impending U.S. default last month, that Professor Robert Shiller shared the Nobel Prize for Economics this year.  With the stock market hitting new highs on the resolution of the debt-ceiling debacle and the nomination of Janet Yellen as Federal Reserve Board Chairwoman, we thought it an apt time to revisit the Shiller-popularized Cyclically Adjusted Price Earnings ratio (CAPE).  We have modified his original work; we use a 10-year real average S&P 500 earnings compared to subsequent 10-year S&P 500 total returns.  He focused on 20 year returns but admitted that 10 years works pretty well, too.

shiller chartTo summarize, Professor Shiller’s conclusion was stock prices, on the whole, are much more volatile than the underlying dividends or earnings would suggest (i.e., something else, likely emotion, is playing a large role in observed volatility).  With that insight, Shiller went on to suggest that investors could improve their long-term results by committing funds to the stock market when the CAPE [also known as P/E(10-year)] ratio is low and dialing down their risk level when the ratio is high.  The first chart to the left, from his book Irrational Exuberance, displays the results of his research with the horizontal axis plotting the 10-year inflation adjusted P/E (CAPE) and the vertical axis plotting the subsequent 20-year annualized stock market return.   This is a simple, if not axiomatic, concept for any investor: buy low, sell high.  As history demonstrates, however, it is a difficult concept in practice when emotions (greed and fear) enter in to the equation.

So, what should investors expect given today’s earnings and stock prices?  We have updated and adjusted, as indicated above, his research with data through September 30, 2013 (note, too, we have removed a few data points from the Great Depression which we believe skew the plotted data but don’t change the overNWIC chartall conclusion).  The next chart to the left displays that research with a logarithmic trend line and intersecting lines indicating where we are today (Adj CAPE of about 21).  Our best guess is investors should temper their expectations, after nearly five years of a recovering market from the Great Recession, to a return range of 6-7% over the long run from today’s market valuation.  Also note, the deviations from the trend line at higher market valuations (lower down the curve in the second chart above) appear to be larger to the negative side.