ESG funds and 529 plans

For parents looking to fund their child’s education, a 529 plan is an optimal way to grow savings through investments and gain significant tax breaks in the process. But as we have previously explored, investments that grow your own portfolio may be causing harm to others by supporting companies that don’t take their social or environmental impact into as much consideration as their bottom line.

In recent years, “environmental, social, and governance” (ESG) investing has emerged as one way to rectify the immorality often inherent to investing. Employing this strategy in a 529 plan promises an ideal scenario of investing in your child while also making a positive impact.

However, not all 529 plans have ESG options. This article will go over the basics of 529 account and ESG investing before showing, state by state in this PDF, which 529 plans allow you to invest ethically to shape a better future not just for your family, but for humanity.

529 plans: an overview

529 plans are tax-advantaged savings accounts specifically designed to be used to pay for education. Anyone can open a 529 account, but a parent or grandparent usually sets them up on behalf of a beneficiary child or grandchild. While originally intended for college tuition, in 2017 they were made eligible for K-12 education as well.

The main benefit of 529 plans is that withdrawals from the account are not subject to federal or state taxes as long as the funds are used towards education expenses. However, while the federal tax code legitimizes 529 plans, the states administer the plans themselves. Each state has slightly different rules and regulations with regard to 529 plans and the benefits or tax exemptions you can receive. For instance, some states offer tax deductions or credits on contributions to 529 accounts, while others do not.

The most common type of 529 plan is an “education savings plan,” offered directly by the states themselves or from brokers like Fidelity and Vanguard. When the account holder contributes money to a 529 savings plan, the money is stashed in a portfolio of investments that will grow until the child is ready to attend college.

Unlike typical brokerage accounts, 529 plans generally have a limited selection of investment choices. For some people, this may be a convenience as it lessens the stress of choosing your own investments. Many 529 plans also offer “target date funds,” which optimize the portfolio based on a time frame specified by the investor. This usually means having more aggressive investments for longer time scales and slowly becoming more conservative as the target date approaches.

For investors who prefer control over their portfolio, 529 plans can be inconvenient. This is especially true for socially-conscious investors, as many 529 accounts do not offer options catered to this approach. Choosing the right 529 plan is critical for investors who want to follow ESG or related approaches.

ESG investing explained

Environmental, social, and governance (ESG) investing is a set of criteria that investors can use to screen for socially-conscious companies.

Environmental criteria screen for a company’s impact on the natural world. This may include climate policies, energy or resource use, greenhouse gas emissions, and treatment of animals.

Social criteria examine a company’s efforts in promoting social justice within and without their organization. Factors include stances on racial diversity, LGBTQ+ policies, and overall policies within the company but also advocacy for justice in the public sphere.

Governance criteria focus specifically on company leadership: their actions, interactions, objectives, and accountability, among other factors.

ESG scores for companies are calculated by investment research firms like Bloomberg, S&P, and Dow Jones. It is possible to invest in individual companies with high ESG scores, but a more convenient option is to invest in ESG mutual funds or exchange-traded funds (ETFs) that contain a basket of high-ESG scoring organizations. Some popular ESG funds include the Vanguard FTSE Social Index Fund (VFTAX) or iShares MSCI USG ETF (SUSA).

ESG investing in 529 plans

As noted above, not all 529 plans offer ESG investments in their portfolio options. Here is a full list of 529 plans – state by state – with the availability of ESG investing in each one.

Notes and considerations

Options for 529 investment vary widely, especially with regard to ESG alignment. Only 20 states currently offer ESG funds as part of their 529 programs. And almost all of these are individualized or customizable portfolios; only one state, California, offers an automatic enrollment year portfolio with ESG criteria.

Anyone can invest in a 529 plan from any state. So, if your home state doesn’t have ESG options, you can easily access these portfolios from other states. However, choosing your own state’s plan is usually the only way to get special tax deductions on contributions; this is an important factor to weigh into consideration.

Recha Bergstrom is a women’s imaging radiologist. She is founder and CEO, The Physician Philanthropist, helping doctors learn how to donate effectively and invest responsibly so they can maximize their positive impact on the world, and can be reached on LinkedInFacebook, and Instagram. Join the private Facebook group, The Physician Philanthropist Group.

Image credit:


Source link

Leave a Comment