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John J. Gardner, CFP®, CPM®

blackhawkwealthadvisors.com

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May 29, 2024

529 Day

Happy 529 Day! Today, May 29, is 529 Day. Maybe not according to Hallmark, but for savers and investors 529 Plans have been celebrated the last 20+ years. In 1996 Congress enacted Section 529 of the Internal Revenue Code, establishing federal tax rules for 529 college savings plans. However, it was not until the Economic Growth and Tax Relief Reconciliation Act of 2001 made qualified distributions tax-exempt that these plans really started to grow.

529 plans revolutionized the way parents and grandparents save for college, similar to the way 401(k) plans revolutionized retirement savings. Americans are pouring billions of dollars into 529 plans, and contributions are expected to increase dramatically in the coming decade. So with 529 Day, I thought it would be a good time to boost awareness of these college savings plans. Here some highlights to help you go back to school on 529 plans.

What is a 529 plan?

These plans were officially created by Congress as qualified tuition programs under federal law. The reason “529 plan” is commonly used is because 529 is the section of the Internal Revenue Code that governs their operation. They are simply college savings accounts with federal tax advantages. In essence, Congress created a partnership between the federal government and the states to promote college savings, rather than having families rely on loans for their children’s education. These education savings accounts have an owner and a beneficiary. The owner is the parent or grandparent, most typically. The beneficiary is the child/student. The federal tax break is only one benefit of 529 plans. Below are other 529 plan benefits.

529 plan benefits

• Triple-Tax Benefit+: In addition to favorable federal tax treatment, some 529 plans also benefit from state tax breaks. Since every state governs how they tax 529’s, some (including California) give tax benefits. The first benefit is tax deferral. All 529 plan contributions compound tax deferred relative to federal tax, and when allowed, also tax deferred from state tax. Then when withdrawn for ” qualified educational expenses” there is no tax due. So, both fed and state tax deferred gains and tax-free (fed and state) withdrawals. Triple-tax win. The only thing better would a 4th tax benefit – deductible contributions to the savings plan. While 529 plan contributions are not tax deductible from federal tax, some states do allow a tax deduction for these contributions. Nine do, California is not one of them. The plus (+) tax benefit of 529’s is favorable federal gift tax treatment: Contributions to a 529 plan are considered completed, present-interest gifts for gift tax purposes. This means that contributions qualify for the $18,000 annual gift tax exclusion (in 2024). This exclusion is an individual one, meaning a married couple giving jointly could gift up to $36,000 to one beneficiary in 2024.And with a special election, you can contribute a lump sum of $90,000 to a 529 plan, treat the gift as if it were made over a five-year period, and completely avoid gift tax. That’s $180,000 for a married couple. This is called “Superfunding 529’s”.  The IRS allows you to do this for each beneficiary if you’re contributing to 529s for multiple people. No gift tax.

• Not just four-year College Education: Uses for 529 account savings is not limited to college. Up to $10,000 per year per beneficiary in 529 funds can be used to pay for private school costs from kindergarten through 12th grade. And funds can also be used for beneficiaries who attend eligible vocational, or “trade” schools. The beneficiary gets to pull money out of the 529 tax free at any age for any qualified education expenses after the initial deposits grew tax deferred.

• Pay Down Debt: 529 beneficiaries can also use money in the account to pay off a portion of their student loans. There’s a $10,000 lifetime cap. Paying off some school debt with tax free dollars is a good deal. However, if the interest rate on the loan is low, money may be better off remaining in the 529 growing at a tax-deferred, higher rate.

• Availability: 529 plans are open to anyone, regardless of income level. And you don’t need to be a parent to set up an account.

• High Contribution Limits: The total amount you can contribute to a 529 plan is generally high. Most plans have limits of $300,000 and up. The limits to how much can be contributed to any beneficiary’s 529 are set by each state, not the IRS. The contribution limits are based on total amount allowed per beneficiary, not annual limits. Tax law simply notes that the amount contributed to a 529 (also called a qualified tuition program, or QTP) can’t be more than what’s needed to pay for qualified education expenses. The final contribution cap is set by state. In California it is $529,000 this year. That’s an interesting number…. Wisconsin allows the most, $567,500, while Mississippi and Georgia the least at $235,000.

• Another Tax Benefit: A recent change in the Free Application for Federal Student Aid (FAFSA) makes it even more appealing for grandparents to set up their own 529s for their grandkids. Starting with the 2024-2025 academic year, any 529 dollars used to pay for a grandchild’s tuition or educational costs will no longer be counted as student income. Under the old rules, distributions from grandparent-owned 529 plans were reported as untaxed student income, according to Saving for College.

• Estate Plan Benefits: Here’s sound estate planning advice for grandparents 73 years or older. They can also use their annual required minimum distributions as a gift source and contribute to their grandchild’s 529. The benefit is twofold: the grandparent can lower the value of his or her estate, and, dollars shifted into the beneficiary’s 529 will again benefit from tax-deferred growth and tax-free withdrawals.

• Also Retirement Savings: This a new and advantageous rule change for 529 plans. A recent tax law change allows some of the dollars sitting in the 529 account to fund the 529 beneficiary’s retirement. Thanks to the SECURE 2.0 Act, starting in 2024, you can roll over unused 529 assets into the account beneficiary’s Roth IRA. And you can do it without incurring the 10% non-qualified withdrawal penalty or generating any taxable income. However, there’s a lifetime limit of $35,000. The maximum Roth IRA contribution in 2024 is $7,000. That means you’ll need to make these rollovers over a course of five years to max out the $35,000 that’s eligible to roll over. This newest benefit to 529 plans comes with the most rules and requirements. So seek the counsel of a tax advisor professional before rolling 529 plan dollars to a Roth IRA.

• Pass It On: One last benefit of 529 plans is their transferability. 529 plan rules allow you to transfer an account balance from one beneficiary to another. For example, that might be moving the funds to a younger child after your older child graduates from college. Or, maybe your child doesn’t attend college. Then, the 529 holder can also keep investing in the 529. The 529 fund can then pass to a grandchild via beneficiary transfer.

Any Drawbacks? Yes…

• Nonqualified withdrawals: If money in your 529 plan is used for something other than education expenses, there will be a penalty. There is a 10% federal penalty on the earnings part of any withdrawal that is not used for qualified expenses (a state penalty may also apply). Additionally, all earnings are subject to ordinary income taxes.

Happy 529 Day…

Proper Perspective:  In our hectic and often hard to comprehend world, it is very easy to lose perspective. You may agree it is sometimes difficult to see the big picture. The media often doesn’t help with this, but unfortunately instead encourages us to see things in a most negative light. Here is hopefully a pause to gain positive perspective.

“I have always considered marriage as the most interesting event of one’s life, the foundation of happiness or misery.”

~~George Washington, 1785

What Happened On This Day May 29, 1953 – After numerous failed attempts by others, Edmund Hillary and Tenzing Norgay become the first people in the world to reach the summit of Mount Everest.

INDICATORS OF INTEREST:

• Market’s Current Signal: Market in Confirmed Uptrend.  Analysis of the stock market over 130 years of history shows we can view it in terms of three stages – market in uptrend, uptrend under pressure and market correction. I analogize this to a traffic signal’s changing colors from green to yellow and then to red. It is still green. Since the 1880’s, this perspective has led to investment out-performance relative to market indexes. This is due to trend analysis which determines risk reducing, return enhancing market entry and exit points.

The Stock Market Trend: Confirmed Uptrend. From November 1 to last week the market was in a Confirmed Uptrend. Market action on April 12 triggered the weakened trend signal to Uptrend Under Pressure. After running higher 18 out of 22 weeks, the SP 500 fell 3 consecutive weeks. May 16 market action changed that again, triggering a positive trend change back to Confirmed Uptrend.

Here are key market levels as of Monday, May 20:

Recapping Last Week

U.S. equities rose to fresh all-time highs after inflation, retail sales, and other economic data cooled slightly, sending interest rates lower and improving optimism for rate cuts this year. The S&P500, Nasdaq Composite and Russell 2000 indices all gained between 1.5% and 2%, while the Dow Jones Industrial Average passed the $40,000 level for the first time (see note to clients on Dow 40k). S&P500 sector breadth was firmly positive, led by a 3% jump in technology. Crude oil and gold futures both added more than 1.5%. U.S. Treasury yields fell after U.S. consumer prices rose less than expected. April CPI gained 0.3% MoM and 3.4% YoY, while core CPI cooled for the first time in six months. Shelter and gasoline continued to account for most of the price increases, which resulted in a bump in producer prices. Overall, the numbers represented a small step in the right direction for the Fed’s fight against inflation, but only a sustained trend would lead to the September rate cut that investors are hoping for. Other economic data pointed to a gradual slowing in activity, as U.S. retail sales were flat in April and industrial production stagnated. Manufacturing declined again in the New York region, while new orders and shipments turned negative in the Philly Fed survey. Homebuilder sentiment fell for the first time since November as high mortgage rates weighed on confidence, while housing starts and permits rose less than expected in April.

Internationally, Japan’s economy shrank more than expected in Q1, with GDP sliding 2.0% annualized and 0.5% QoQ. That news complicated the Bank of Japan’s intention to raise interest rates, as domestic demand remained uncertain. In China, factory output beat expectations in April, but retail sales slowed. The real estate sector also continued to hamper the economy. Last Friday, the Chinese government announced its most dynamic attempt to prop up the beleaguered property market, easing mortgage rules and encouraging local governments to buy unsold homes. Elsewhere, European GDP increased by 0.3% in Q1, compared to a prior decline of 0.1%. Economic sentiment improved in the Eurozone as signs of recovery grew. However, in its bi-annual Financial Stability Review, the European Central Bank warned of potential negative surprises due to geopolitical tensions and elections around the globe. Britain’s unemployment rate jumped to 4.3%, its highest level in a year, while wage growth remained unchanged in Q1. Finally, Australia’s labor market also weakened in April while the Wage Price Index eased in Q1, reinforcing speculation that the central bank is more likely to lower rates rather than to raise them in 2024.

Current View

A Broader Stock Market Rally Continues…

A simple piece of evidence is the S&P 500, at yesterday’s close of 5307, has expanded its gain to 11.3%. Annualized, and excluding dividends, this is quite good. This is on top of its 24% jump in 2023, though it fell about that much in 2022. So remember, the stock market’s nature is inherently volatile. Meanwhile, the Dow Jones Industrial Average, which dropped 0.5% yesterday to 39,671, is also chugging along. A gain of 5.3% year-to-date lags the Nasdaq and the S&P 500. However, it too is showcasing strength in certain sectors outside technology. Stocks started trading today with the major indexes mixed and the Nasdaq acting strong. This comes after chip and AI leader Nvidia reported its much anticipated earnings report late yesterday. The Dow Jones Industrial Average pulled back 0.7% and remained below the 40,000 level.

April 12 the stock market signal changed to Uptrend under pressure. On April 15 the Nasdaq dropped 1.8% in heavy distribution day. The tech-weighted index lost about 4.5% for the month of April and looked as if it might relinquish all of its ’24 gains. The ‘sell in May and go away’ plan would not have worked, as the U.S. stock market has rallied strongly this month.

• Industry Group Strength:  BULLISH. As of yesterday, 128 out the 197 groups I monitor are up year-to-date. 69 are down.
• New Highs vs. New Lows: BULLISH.  In yesterday’s session, there were 108 new 52-week highs and 96 new 52-week lows.
• Dow Dividend Yield:  BEARISH. The current yield for the Dow Jones Industrial Average is 1.9%. The 10-year Treasury now 4.48%. This rate is up from 4.36% 2 weeks ago.
• Volatility Index:  BEARISH. Volatility has been volatile. The “VIX” is near 12. It is down from 19 a month ago. The index is also known as the “Fear Index.” It is considered a contrarian indicator and therefore viewed as bullish as it rises indicating investors are becoming more fearful. The VIX:

• Fear / Greed Index: BEARISH.  Investors are driven by two emotions: fear and greed. Too much fear can create a condition of oversold/ undervalued stock prices. Too much greed can result in overbought/overvalued stock prices. The AAII Investor Sentiment Index is now neutral.   BE FEARFUL WHEN OTHERS ARE GREEDY. At 59, the Fear & Greed Index is down from 36 a month ago.

CLICK VIDEO FOR MORE ON THE “FEAR & GREED INDEX”

How CNNMoney’s Fear & Greed Index works

• Bull / Bear Barometer:  BEARISH. This secondary market indicator should also be viewed with a contrarian perspective. As of yesterday, according to the latest survey of stock market newsletter writers by Investor’s Intelligence (see below), bullish sentiment is 59.4%. The bear sentiment is now 17.2%. Consider this a contrarian indicator because the crowd is often wrong at market tops and bottoms. In other words, extreme bullishness has been seen near several market tops in the past, while extreme bearishness has been seen at market bottoms.  Note how close market sentiment is near the 5-year bullish high and near the 5-year bearish low…

• Put / Call Ratio: BEARISH. The ratio of put-to-call options is 0.50.  It is about the same as a month ago. The put-call ratio tracks the mood of what options investors are doing, not just saying. They typically buy puts if they think a stock will decline and calls if they think it will rise. If they’re buying lots of puts, they see the market declining. And if they’re loading up on calls, they’re generally bullish. Historically, market bottoms occurred when the reading spikes to 1.2 or more. Market tops are often made when the reading is 0.6 or less. Note how reliable this is with respect to the February record low coinciding with the market high. Keep in mind this is also a contrarian indicator.

Global Economic Indicators & Analysis:

POSITIVE INDICATORS

S&P Services and Manufacturing Indexes Up: The U.S. economy gained speed in May, a pair of S&P surveys found, and businesses were optimistic about future growth even as high inflation persisted. The S&P flash U.S. services index of purchasing managers jumped to a 12-month high of 54.8 in May from 51.3 in the prior month. These managers are in charge of buying supplies for their companies. The flash U.S. manufacturing PMI, meanwhile, rose to 50.9 in May from 50.0. Numbers above 50 signal growth in the economy. The surveys are the first indicators of each month to give a sense of how the U.S. economy is performing. Numbers above 50 signal growth in the economy. The surveys are the first indicators of each month to give a sense of how the U.S. economy is performing.

Labor Market Still Strong: The number of Americans who applied for unemployment benefits last week fell again to 215,000, reaffirming that layoffs are low and the economy is being buoyed by a strong labor market. Initial jobless claims have hovered between 194,000 and 232,000 this year, a remarkably low level last achieved consistently in the 1960s. New jobless claims fell in 33 of the 53 states and territories that report these figures to the federal government. Claims rose in 21 others, but all the increases were small. The low level of layoffs reflects a tight labor market in which good help is hard to find. The strong labor market has been a key bulwark against the threat of recession.

U.S. Housing Inventory Hits High: U.S. home sales fell in April, as home buyers struggled with an expensive housing market. But the industry is optimistic about the pace of sales moving ahead, as inventory increased to the highest level since October 2021. Sales of previously owned homes fell by 1.9% to an annual rate of 4.14 million in April, the National Association of Realtors said last Wednesday. That’s the number of homes that would be sold over an entire year if sales took place at the same rate every month as in April. The numbers are seasonally adjusted. Compared to April 2023, home sales are down 1.9%. The housing market is catching glimpses of a more upbeat future, as mortgage rates fall and housing supply increases. While sales were down in April, the uptick in inventory will likely be gobbled up by significant pent-up demand from home buyers. Lower rates will also make it more affordable to take on a mortgage, and also contribute to the easing of the so-called lock-in effect.

Philly Factory Gauge Cools, Still In Expansion Territory: The Philadelphia Fed said its gauge of regional business activity fell to 4.5 in May from 15.5 in the prior month. Any reading above zero indicates expanding conditions. This is the fourth straight month of expansion. The barometer on new orders fell to negative 7.9 in May from 12.2 in the prior month. That’s the first negative reading since February. Manufacturing is moving sideways, but some economists remain optimistic that growth is just around the corner. The Philadelphia Fed index is one of the first regional manufacturing gauges that offer timely reads of the manufacturing sector.

Housing Starts Rebound: Construction of new homes rose 5.7% in April, as builders ramped up new projects. The pace of construction accelerated up as builders try to meet pent-up home-buying demand as mortgage rates are poised to fall over the coming months. U.S. housing starts rose to a 1.36 million annual pace from 1.29 million in March. That’s how many houses would be built over an entire year if construction takes place at the same rate each month as in April. Multi-family starts boosted the overall number, while single-family starts declined slightly. Housing starts are generally a volatile data series, but the data indicates a broader trend that home builders are feeling nervous about buyer demand in the face of how expensive it is to purchase homes.

CPI Inflation Rate Slows: The cost of consumer goods and services rose 0.3% in April, largely because of higher oil prices and housing costs, as inflation remained elevated in key parts of the economy. Wall Street is also likely to take some solace from a relatively modest 0.3% increase in the so-called core rate of inflation that strips out food and energy. It was the smallest rise in four months. The core CPI climbed 3.6% in the 12 months ended in April, down from 3.8% in the prior month. That’s the lowest reading since April 2021.

Retail Sales Flat: Retail sales were unchanged in April. The sales at gas stations offset weakness in cars and several other categories. Sales of food, building materials and electronics all saw strong gains. Consumers have pulled back some since the start of the year, but spending remains strong. The tapering off of spending compared with last year isn’t surprising, given that real income growth hasn’t been as high and people are saving less.

Powell Expects Inflation to Retreat: Federal Reserve Chair Jerome Powell said that he sees inflation retreating in the coming months and pushed back on the expectation of some economists that the next move by the central bank will be to raise interest rates. He said he expected inflation to cool to the level of the low monthly inflation prints seen late last year. However, he said he wasn’t completely confident in this outlook. “I would say my confidence [in that forecast] is not has high as it was, having seen the readings in the first three months of the year,” Powell said. “We’re just going to have to see where the inflation data fall out,” he added. This was a repeat of his message from his press conference earlier this month, when he said that the Fed needs to be patient and keep rates steady for a longer period of time to ensure that inflation comes down.

Import Price Index Spikes:  The cost of imported goods rose in April for the fourth month in a row and increased at the fastest pace in two years, reflecting the persistence of elevated U.S. inflation. The import-price index jumped 0.9% last month, triple the forecast of economists polled by the Wall Street Journal. The cost of imports rose 1.1% in the 12 months that ended in April. They had declined year over year for 13 straight months before turning higher in early 2024. Cheaper import prices had helped to lower U.S. inflation last year because Americans buy so many foreign-made products. Higher import prices make U.S. inflation worse.

Home Builder Confidence Wanes:  Builder confidence plunged in May, as they see home-buying activity wane in the face of high mortgage rates. High rates weighed on sentiment among home builders, which dropped for the first time since November 2023. Confidence fell to the lowest level since January. Builders are ramping up incentives and cutting prices to keep buyers interested. Builders are getting spooked by high mortgage rates. But with new inflation data from last Wednesday showing a small slowdown in consumer prices, mortgage rates could fall further in the weeks to come.

Empire State Manufacturing Survey Weakens: The New York Fed’s Empire State business-conditions index, a gauge of manufacturing activity in the state, fell 1.3 points in May to negative 15.6. This is the sixth straight month below zero, which indicates deteriorating conditions. Optimism about the outlook remained subdued, the New York Fed said. The index for future business conditions edged down 2 points to 14.5. Capital expenditure plans also softened. The factory sector has struggled in the aftermath of the pandemic. Expectations of a rebound have been muted recently as the Federal Reserve holds interest rates at high levels. The national ISM factory index fell back into contraction territory in April after hinting at expansion in March.

PPI Surges Again: U.S. wholesale prices jumped 0.5% in April in another sign of sticky inflation. Wholesale costs often foretell future inflation trends. The increase in wholesale prices over the past 12 months rose to 2.2% in April from 1.8% in the prior month and hit the highest level in a year. The increase core prices over the past year rose to 3.1% from 2.8%. It had fallen to as low as 2.5% last fall. The Federal Reserve views the core rate as a better predictor of future inflation. The PPI report captures what companies pay for supplies such as fuel, packaging and so forth. These costs are often passed on to customers at the retail level and give an idea of whether inflation is rising or falling.

Call me if you have any questions. I am always happy to help!

John J. Gardner, CFP®, CPM®, AIF®

Blackhawk Wealth Advisors, Inc.

3860 Blackhawk Rd. Ste. 160 Danville, CA. 94506

Phone: 888-985-PLAN · Email: jg@blackhawkwealthadvisors.com

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For my Market Monthly podcast, click on the link below. I provide a review of global stock market highlights over the past month and preview of the month ahead. Forward insights and perspectives are based on current financial market and economic trends with an emphasis on relevant developments in various areas from Fed policy to company earnings announcements.