Colorado Stable Value Plus 529 Plan: 3.04% Return Guaranteed Through December 31, 2013

By Harry Sit

Fall Commencement 2008- 004

For the most part, 529 plans offer mutual funds as investment options. Since 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.

I first heard about these from financial advisor Dylan Ross of Swan Financial Planning two years ago in his comments to my post about asset allocation for a 529 plan. It made sense back then. It makes even more sense now.

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, 2013 is 3.04% 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 stable (pun intended) when the rates on other fixed income investments dropped like a stone in recent years. If it has held up so far, there is no reason to suspect that it will drop much soon. 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. 21 states either don’t have a state income tax or don’t offer any tax break for using an in-state 529 plan. If you live in these 21 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, 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. 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 1.75% 3/31/2013
Connecticut 1.70% 6/30/2013
Minnesota 1.60% 3/31/2013
Oklahoma 1.60% 3/31/2013
California 1.50% 12/31/2012
Mississippi 1.50% 2/28/2013
Michigan 1.45% 12/31/2013
Georgia 1.35% 12/31/2013
Kentucky 1.35% 6/30/2013
Vermont 1.25% 9/30/2013
Wisconsin 1.25% 12/31/2013

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.

***

The hypothetical couple with $1 million portfolio in my "double the bond yield" pursuit decided to do the swap. They moved $100,000 from Vanguard Total Bond Index Fund with a yield of 1.6% to the Colorado CollegeInvest Stable Value Plus 529 plan paying 3%. This move earned them an extra $1,400. That’s $700 per person per year.

Now they are two-thirds complete of their goal of doubling the yield on their fixed income investments. I’m confident they will be able to hit their target soon.

[Photo Credit: Flickr user pennstatelive]

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Posted on January 14, 2013 under Investing. Keywords: , , .

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Comments

8 Comments on Colorado Stable Value Plus 529 Plan: 3.04% Return Guaranteed Through December 31, 2013

  1. Sean @ One Smart Dollar on January 14, 2013
     

    Great article Harry. I live in Denver and have been starting to think about how I want to invest for our 2 month olds college education. This is definitely something to consider.

  2. JohnInIowa on January 15, 2013
     

    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.

  3. Harry on January 15, 2013
     

    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.

  4. JohnInIowa on January 15, 2013
     

    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.

  5. Harry on January 15, 2013
     

    No worries. Hope you are comfortable enough with MetLife. I think this is much better than the alternatives paying nothing.

  6. Ben on January 18, 2013
     

    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

  7. Harry on January 19, 2013
     

    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.

  8. Ben on January 20, 2013
     

    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 !

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