Nine certified financial planners offer advice for parents and other investors who have Guaranteed Education Tuition units, which can be cashed out with no state penalty between now and December 2016.
Now that the state has decided that account holders can withdraw money penalty-free from the state’s prepaid college tuition program, should you take the deal if you bought units recently — or a decade ago, when GET was a bargain?
The Seattle Times asked nine area certified financial planners what they recommend account holders do with Guaranteed Education Tuition (GET) units, which are frozen indefinitely at a payout value of $117.82 each. One hundred GET units are guaranteed to pay for a year of tuition at the state’s most expensive public university.
Some said that if your child is within a few years from enrolling in college, and if you bought the units for $117 or less, you might as well stay in GET — especially if you have a low tolerance for risk.
But others counseled finding another type of investment.
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If your children are younger and you have a longer stretch of time to invest, consider rolling your money into another state’s 529 college savings plan rather than staying in the frozen GET plan, advisers said. And if you bought into GET in the last four years, when units cost $163 or more, all nine said your best bet is to withdraw from GET.
Pay attention to IRS tax rules. If you made money on your GET units — that is, if you paid less than $117.82 for them — you’ll likely want to roll the funds into another state’s 529 plan 60 days after the refund is issued, or you’ll have to pay income tax and a 10 percent penalty on the gains you made. Investors who bought units for $163 or more won’t be penalized if they don’t reinvest in a 529 because they didn’t make any money, GET officials say.
But the IRS tax question is complicated because many customers bought units at different price points over the years. Customers who request refunds will receive statements that break down principal and earnings, GET officials said. Customers who take a refund are encouraged to consult with a tax adviser, and read IRS Publication 970.
Here’s a rundown of the advice:
For older students
If your child is already in high school, college is on the horizon and you bought your GET units many years ago, you’ll want to choose a low-risk investment. So it’s unlikely you’ll make much money if you switch to another state’s 529 college savings plan, some advisers said.
“With GET, the state bears most of the investment risk,” said Joe Hebert, co-founder of trueNorth Wealth Advisors of Seattle. “Moving assets out of Washington’s GET program to another state’s 529 plan means you must be willing to bear the investment risk associated with those new investment options.”
And then there’s the hassle of converting to another plan and the associated startup fees. It’s probably “not worth the switch, and you don’t want to have those assets aggressively invested this late in the game anyway,” said Kathryn Haggitt Garrison, senior financial adviser for Moss Adams Wealth Advisors of Seattle.
If you were an early investor who experienced good returns, “you may be happy enough with that return even if there is no prospect for growth in payout value for several more years,” said Gary Brooks, a certified financial planner with Brooks, Hughes & Jones Wealth Advisors of Tacoma. That’s especially true if you are risk-averse and certain your child will go to a public school in Washington.
However, if your child wants to go to an out-of-state college, you may not want to sit on your money. A conservative 529 savings plan may be for you.
For younger students
If your children are younger and you have a longer time to invest, most financial planners agree that you should cash out of GET and find another plan because GET could be stagnant for years.
But when you pick another plan, be aware of any fees and commissions. Many advisers suggested finding plans that allow you to purchase directly, without a broker, to avoid commissions. And look for plans with low operating expenses, less than .5 percent a year.
Advisers recommended the website SavingforCollege.com to help sort through the options. Morningstar also offers good advice on 529 plans.
But not all advisers said you should get out of GET.
“For conservative clients with young children, it may make sense to stay with the GET program so they can prepay college tuition costs with certainty and not take the risk of an unknown increase in tuition,” said Rachele Bouchand, director of financial planning for Clark Nuber, a Bellevue consulting firm.
Heather Hewson Rock plans to keep the GET units she bought for her children, who are between the ages of 7 and 13. The senior vice president and financial adviser with Baird in Seattle bought the units at a good price, and she has other college funds invested in 529 plans. Having both GET prepaid units and a 529 savings plan means she’s diversified her investment.
Because account holders could only buy 500 GET units for each child, and because 100 units covers only a year of tuition costs — not all the other expenses that go along with college — planners said you should have other investments dedicated to college, too.
For recent GET purchases
What if you paid $163 or more for your GET units, the price since 2012? All nine financial planners said you should cash out.
Lowering tuition was a good thing for many people, but participants who bought units for $163 or more “have been financially harmed by the Legislature’s decision,” Brooks said. “They’ve suffered an opportunity cost by having purchased GET units instead of putting the same amount of money into a 529 savings plan.”
If you bought units for $163 or more, there will be no federal taxes or penalties owed because you gained no money, GET officials said. And account holders who purchased units for $117 apiece — 82 cents less than the current payout — will pay minimal IRS penalties and taxes because the penalty and tax will only apply to the 82-cent-per-unit gain, they said.
If your child will soon be entering college, you could instead invest in a CD or money market fund, Garrison said.
The committee gave investors until December 2016 to decide whether to cash out, but Brooks thinks it’s best to make changes as soon as possible, because any time your money stays in GET is “more time with no return on your investment while tuition climbs almost everywhere outside of the Washington state system.”
But other advisers, including Hebert, suggested waiting to see whether the state will quickly create its own 529 plan. The GET committee is charged with giving lawmakers a feasibility study on a Washington plan by December 2016, but some GET committee members say they hope it could be up and running before them.