Colorado Stable Value Plus 529 Plan: 2.64% Return Guaranteed Through December 31, 2014

Fall Commencement 2008- 004

[Updated on Jan. 14, 2014 with new rates for 2014.]

For the most part, 529 plans offer mutual funds as investment options. After the financial crisis in 2008-2009, many 529 plans added more conservative, guaranteed principal options offered by banks and insurance companies. Because money in 529 plans is typically long term, these guaranteed principal options sometimes offer attractive yields. They can be a better deal than bond mutual funds because they don’t have interest rate risk.

These guaranteed principal options are especially good for students who are already in college or about to enter college. When you are going to withdraw the money in a few years, even bond mutual funds are too risky. For instance, the moderate-risk age-based portfolio for a student age 19 or over in the Vanguard 529 plan (Nevada) lost 3.4% in 2013.

Colorado’s CollegeInvest Stable Value Plus 529 Plan offers a stable value fund by MetLife. The interest rate resets every year in December. The rate guaranteed through December 31, 2014 is 2.64% after admin fees charged by the Colorado 529 plan.

The stable value fund is only guaranteed by MetLife. MetLife is rated Aa3 by Moody’s and AA- by S&P. Although MetLife isn’t FDIC, I would be OK with a guarantee by MetLife.

The interest rate offered by the MetLife stable value fund has been relatively stable (pun intended). A Colorado state law about “the minimum nonforfeiture rate for annuity contracts” might have something to do with it.

* Source: CollegeInvest Stable Value Plus Plan Disclosure Statement

You don’t have to live in Colorado to use Colorado’s 529 Plan. You can have more than one 529 plans in different states for the same beneficiary. You can transfer money from one 529 plan to another 529 plan once every rolling 12 months for the same beneficiary if you didn’t get a state income tax deduction which requires a claw-back when you transfer out.

22 states either don’t have a state income tax or don’t offer any extra tax break for using an in-state 529 plan. If you live in these 22 states, you are completely free to use a 529 plan from any state: Alaska, Arizona, California, Delaware, Florida, Hawaii, Kansas, Kentucky, Maine, Massachusetts, Minnesota, Missouri, Nevada, New Hampshire, New Jersey, North Carolina (effective Jan. 1, 2014), Pennsylvania, South Dakota, Tennessee, Texas, Washington, and Wyoming.

If you get a state income tax deduction for your 529 plan contribution, the deduction usually has an upper limit. If you are contributing more than that limit, the additional money can still go to a 529 plan from any other state.

If MetLife isn’t good enough for you, TIAA-CREF offers similar options in many 529 plans it runs, albeit at substantially lower interest rates. TIAA-CREF is one of a handful of insurance companies with the AAA rating. The interest rates and the rate expiration dates vary from plan to plan.

State Rate Guaranteed Through
Oregon 1.30% 3/31/2014
Connecticut 1.35% 6/30/2014
Minnesota 1.25% 3/31/2014
Oklahoma 1.15% 3/31/2014
California 1.20% 12/31/2014
Mississippi 1.05% 3/31/2014
Michigan 1.20% 12/31/2014
Georgia 1.10% 12/31/2014
Kentucky 1.00% 6/30/2014
Vermont 1.15% 9/30/2014
Wisconsin 1.00% 12/31/2014

These guaranteed principal options offered by insurance companies are good alternatives to bond mutual funds in 529 plans because they offer a competitive yield without interest rate risk. If you currently have bond funds in an IRA and stock funds in a 529 plan, it could make sense to do a swap: sell bond funds in the IRA to buy stock funds; sell stock funds in the 529 plan to buy the stable value fund.

[Photo Credit: Flickr user pennstatelive]

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Comments

  1. JohnInIowa says

    Thanks for bringing this to our attention, Harry. This fund does appear attractive compared for a parent like me, whose child is already in college or nearly so. That’s because such a parent needs a low-risk place to park substantial funds, and amongst 529 plans my alternative now is a money-market or bank fund that earns nothing.

    Two points of correction:

    You will net only 2.33%, not 3.04%. That’s because the plan charges a 0.71% fee that reduces your earnings from the interest. If in the future the interest drops to the minimum 2% and the fee increases to the maximum 1%, then you’ll net only 1% — that’s the worst case scenario, aside from default by MetLife. Details are in the Plan Disclosure Statement pp. 8-9.

    You are free to invest in the Colorado plan regardless of the state you live in — not just the 21 states listed. Other states like Iowa offer a deduction from state income taxes if you invest in their own states’ plan, but that doesn’t keep you from investing in plans of other states with attractive plans. In fact, it is attractive to do so — after you have after you max out the deduction for your own state. In Iowa, you can deduct up to $3,045 per beneficiary — once I’ve maxed that out, I might as well invest any further amounts in another state’s plan because the tax treatment will be no better or worse. For that reason, I have plans in Illinois and Utah also, because they have low fees and decent funds.

  2. says

    JohnInIowa – I research my articles before I publish. I verified with Colorado CollegeInvest that the 3.04% rate is a net rate, *after* the 0.71% expense. The minimum it could go is currently 3% before the 1% maximum expense (2% net). That 3% is Colorado’s “minimum nonforfeiture rate for annuity contracts” which can be changed only through the legislature. I imagine the Colorado legislature has better things to do. Anyway, the net rate is announced each December. If you don’t like the rate for next year, just move your money to somewhere else.

    I already said in the article about investors in states other than the 21 listed. After you get the maximum benefit from your own state’s plan, your extra dollars can still go to any other state’s plan, including this one.

  3. JohnInIowa says

    My apologies, you are correct. Re-reading the Plan Disclosure Statement, I see that the wording flip-flops in its use of the word “minimum” in such a way that a lesser reader like me will confuse “minimum annual interest rate” and the “annual interest rate”. This led me to mistakenly use the so-called minimum rate instead of the higher one that everyone is likely to actually receive.

    My apologies also on the second point. Once again, I must be an inadequate reader. I mistakenly thought that your intent in writing “If you live in these 21 states, you are completely free to use a 529 plan from any state: Alaska, Arizona …” was to imply that if you don’t live in those states you are not similarly free. Sorry about that.

  4. Ben says

    Can you evaluate this option in terms of someone using it purely to increase their return on regular money?

    Like if I’m not saving for college, how much can I contribute, if I pull out the principal there is no penalty (correct?), but there is a 10% penalty on pulling out earnings for non qualified uses. So does that mean your effective return is something like 3% * .9 before tax but after penalty ? Which is still great in today’s markets.

    Whats the upper limit on contributions?

    Thanks!

    -Ben

  5. says

    Ben – You are allowed to name yourself as the beneficiary, say when you are saving money for your aspiration for a Harvard MBA one day. Years down the road if your plan changes and you make a nonqualified withdrawal of the whole thing, there’s nothing wrong with it; you pay 10% penalty on the earnings. But if you make frequent nonqualified withdrawals year in year out, it’s probably against the spirit of the law. The net tax equivalent return after paying 10% penalty on earnings goes like this:

    gross return * (1 – tax bracket – 0.1) / (1 – tax bracket)

    For example if your tax bracket is 30% (federal + state) and the gross return is 3%, the tax equivalent return would be

    3% * (1 – 0.3 – 0.1) / (1 – 0.3) = 2.57%

    This plan allows contributions until your balance reaches $350,000. After that you can accrue earnings but you can’t contribute new money. It’s in the plan disclosure link below the rate graph.

  6. Ben says

    Thanks Harry for the follow up explination. I already went back and got my fancy MBA, so maybe it will have to be for further higher education !

  7. David says

    Harry, I wonder if you might share your current thoughts on this plan now that the rate has been reduced to 2.64% for 2014. Thanks.

    • says

      The basic premise for investing in this plan didn’t change: a competitive yield without interest rate risk. Typical bond funds lost money in 2013. Here you are up 3% and you don’t have to worry about where interest rates will go.

      I just updated the rates for the TIAA options in those other plans. The TIAA guaranteed rates are down too. If I have a large amount of money in 529, I would keep the fixed income money in this plan and use another account for stocks.

  8. Frank says

    Harry, I currently have funds in California’s 529 Plan, but not in a sufficient amount to fund my son’s final two years in college. Two sets of questions for you:

    1. Can I transfer the existing funds in California’s 529 Plan to the Colorado Plan without tax consequences? Would it be like an IRA rollover? How complicated is it to do so?

    2. Can I fund a contribution to the Colorado 529 Plan for my son as the beneficiary using money from a CUTMA account in his name, for which I am the custodian? I had been thinking of funding the remaining “gap” in his college tuition with the CUTMA funds, but it might be better if I can invest those funds into a 529 Plan at this guaranteed rate if the law allows it.

    Thanks for all your articles and insights.

  9. JohnInIowa says

    Frank, I’m not Harry, but you can transfer funds from one state’s 529 plan to another. I’ve done it several times.

    The gotcha to avoid is that if you live in state X and you contributed to the plan in state X and you receive a tax deduction in state X, then state X will likely expect you to pay them tax after you transfer those funds to the 529 plan for state Y. So, if your son’s college years will be done soon and you have 529 funds that resulted in a deduction in your state, you will want to leave those funds there until you withdraw them for an eligible expense.

    re. your question regarding a uniform gift to minors account, some 529 plans can accommodate that type of account. You would have to ask them. For example, I had UGMA funds at a brokerage that I transferred (essentially, rolled over) to the Illinois BrightStart 529 plan, where those funds continue to have UGMA status.

  10. says

    You can transfer from one 529 to another 529, once every rolling 12 months for the same beneficiary. It works like a rollover. Take a look at Colorado’s form here: https://www.collegeinvest.org/images/pdfs/svprolloverform.aspx

    You can also move UGMA/UTMA money into a 529 for the same beneficiary. Of course if you sell whatever is currently invested in the UGMA/UTMA account, you may trigger a capital gains tax, subject to the normal rules for that UGMA/UTMA account.

    • Frank says

      Thanks for the replies, Harry and JohninIowa. I guess I should have looked at the application forms myself first!

      Having done so now, however, it does leave me with another question: I see that I can rollover the CA 529 funds, and I see that I can open an account using UGMA/UTMA funds. But it appears from the application form that Harry linked to that if I use UGMA/UTMA funds, then my son would be the “owner” of that account, not me. Is that correct, and if so, can I rollover the funds from the existing CA 529 account into that new account, or must I actually open a separate account for the rollover funds in which I am the owner (since I am the owner of the existing CA 529 fund)?

    • says

      That’s correct. You son is already the owner of the UTMA account (you are the custodian). When it’s transferred to a 529 plan, he stays as the owner. You are the owner of the California 529 plan account. You stay as the owner when the 529 account is transferred. They are already two accounts now. I don’t see a problem with keeping two accounts separate. I heard having you as the owner counts the money as parent assets which gives him more financial aid than having the money under his name. So just keep them separate.

  11. Chang says

    Harry – Rollover “every year” probably could be further clarified as “every rolling 12 months”. I happened to make a rollover recently to Colorado stable value plan, and the customer service explained that is every 12 months.

  12. Me says

    Harry, while you’re updating, you can add a 22nd state to your list. Effective Jan 1, 2014 North Carolina no longer allows a state income tax deduction for in-state 529 contributions.

  13. Elise says

    I live in Illinois which offers a state tax deduction for in state 529 contributions. (5% tax rate) I contribute, but do not max it out, in part because as my child gets closer to college I have grown more unhappy with the money losing fixed income choices. We have saved up enough that I would like to be able to guarantee it will be there with perhaps modest appreciation. However, the fixed income funds in Illinois have lost money plus have management fees and the money market choice is 0%, although the management fees are currently waived (but with the warning they could be imposed at any time). Would this Colorado plan make sense for me for any NEW contributions I add? I think the clawback provision makes it a bad idea to try to roll existing funds anywhere else. I realize I am giving up the 5% guaranteed return from IL but if the money then sits in the 0% money market for the next few years, at what point does the 5% deduction become not worth it?

    • says

      Actually it’s better to rollover old money than to contribute new money if you are going to forego or pay back the deduction (not saying that you should). If you rollover $1,000, say $300 of the $1,000 is from earnings, you only pay back the deduction on $700, whereas if you contribute $1,000 new money to an out-of-state plan, you forego the deduction on $1,000.

      Between earning 2.64% and losing 5%, assuming you would otherwise be in money market, it takes two years to break even (shorter if your existing balance has more earnings than original contributions). If you are going to stay in bond funds, it’s tough to say because we don’t know whether bond funds will lose money again or earn a little.

  14. JohnInIowa says

    Would it be possible to work around the 12 month limit for rollovers by changing the beneficiary?

    I recall that for the separate issue of the once-per-calendar-year limit for reallocating the funds within an account, there is a workaround where you change the beneficiary (for example from the child to yourself), make the change, then (if desired) reverse the change in the beneficiary. That’s what I’ve read, but I’ve never tried it.

    • says

      I’ve never tried it either. It appears it will work. You rollover into an account with a different beneficiary (must be a member of the current beneficiary’s family, ideally of the same generation). No limit there. You then change the beneficiary. Changing the beneficiary from parent to child counts as a gift, subject to annual gift limit, 5-year election, etc.

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