Learning Quest is a 529 education investment program established by the state of Kansas and managed by American Century Investment Management, Inc.  The program administrator is Kansas State Treasurer Ron Estes.  Learning Quest offers Kansans a tax-advantaged way to invest and save for higher education expenses.

Earnings in the plan grow on a tax-deferred basis at both the federal and Kansas state levels.  One of the advantages of tax deferral is that you don’t have to pay taxes on your money every year like you sometimes do in a non-qualified taxable account.  Additionally, the earnings portion of withdrawals used to pay for qualified education expenses is tax-free at both the federal and Kansas state levels.

Learning Quest offers a very high total contribution limit of $300,000 per beneficiary.  The contribution can be adjusted annually and it is a combination of contributions and earnings.  These contributions are considered completed gifts for purposes of federal tax exclusion.

Contributions can be made by check, electronic funds transfer, automatic investment from your primary bank or paycheck.  Another benefit is that there is no annual account maintenance fee which is important considering most contributions to a 529 plan are relatively small.

There is also to federal gift tax on contributions to Learning Quest for a beneficiary up to $65,000 ($130,000 for spousal gifts) in one year.  But if you made a large contribution, you will have to remember to elect the contribution as being made over a five-year period, and you cannot make any additional gifts to the beneficiary during that time period.

The beneficiary has the flexibility to use the account to pay for qualified education expenses at any eligible educational institution, including community colleges, and vocational and technical schools but is generally limited to accredited U.S. institutions.

Finally, there is one more benefit for Kansas investors: you can receive an adjusted gross income deduction on your state tax return--up to $3,000 per beneficiary, per year ($6,000 if married, filing jointly).

Please keep in mind that today’s column simply represents a broad overview of the Learning Quest.  You should always consult a tax advisor before you make any specific decisions related to investing and saving for college.

Is now the right time to invest in the stock market?  Should you wait until it goes up or down a little?  If you are not comfortable making these decisions, then Dollar Cost Averaging might be an investment strategy for you to consider.  It enables you to invest in equal increments over a period of time. 

Dollar Cost Averaging is the systematic investment of a fixed-dollar amount at regular time intervals.  Those intervals are usually every two weeks as people have money taken out of their paychecks to be automatically invested into their 401(k) or 403(b) retirement plans.  Other investors use this same strategy to have money withdrawn from their checking, savings or brokerage accounts to be invested in a Traditional IRA or a Roth IRA.

By contributing equal dollar amounts every month, you purchase bigger quantities of fund shares the lower the market drops.  So what you are actually doing is buying more and more shares at a cheaper price!  Then, when the market begins to rebound those shares go up and value and your account balance rises.

Additionally, that same dollar amount you are continuing to invest, now buys less shares each time than it did before because the market is higher now.  The result is that you don’t buy as many shares at the higher, more expensive price.

Instead of trying to “time” the highs and lows of the market, a daunting task for even the most professional of investors, you are investing the same amount of money at regular intervals, allowing you to take advantage of market fluctuations and volatility.  The phrase in the industry is, “It isn’t timing the market that works, it is time in the market that works!”

Again, over time you end up, as the chart below shows, with many more shares purchased at a lower price and many less shares purchased at a more expensive price.  One of the great benefits of Dollar Cost Averaging is that it actually turns the uncertainty of market volatility into an investor’s best friend!

Investing with a Dollar Cost Averaging strategy does not guarantee that an investor will make money.  It also cannot prevent losses in a prolonged bear market environment.  However, over time, using Dollar Cost Averaging can be a disciplined strategy which will reduce the average price per share that you pay to participate in the stock market.  

Investing in Stocks or Bonds?

That is a critical question that should be decided with the help of a seasoned and well-qualified investment professional.  Many factors should be considered such as your investment time horizon, risk tolerance and your family’s goals for this particular investment.  Once you have determined your suitability, you can decide how stocks and bonds should fit into your comprehensive financial plan.

Looking at average annual rates of return dating back to 1926, the data indicates that stocks significantly outperform bonds.  That is noteworthy considering we have had some very turbulent times in the stock market.  A few memorable examples are The Great Depression, stagflation in the 1970’s, the bear market in the early 2000’s and then the horrific subprime mortgage crisis of 2007-08.  Oh, and don’t forget about World War II, Vietnam, the Gulf War, 9/11, Iraq and Afghanistan.  Yet even with those foremost historical events, the stock market has continued to steadily climb at a much quicker rate than the bond market.

Over the past 85 years small company stocks have returned to investors an average annual rate of return of 12.1%.  Large company stocks have produced a 10% average annual rate of return.  However, over that same eight-and-a-half decade time frame, corporate bonds have fashioned a 5.6% rate of return and treasury bonds have come in at 5.5%.  Finally, treasury bills have been unable to show an average annual rate of return above 3.7%.  The old adage that it is better to be an owner than a loaner seems to ring true.

Investors should always keep in mind that it is imperative to outpace inflation.  Since 1926 inflation has averaged about 3% annually.  It is the silent beast that slowly ebbs away at your money’s purchasing power by making your dollars worth less tomorrow than today.

When planning for retirement, keep in mind that it takes 7.2 years for your money to double if it is earning a 10% annual rate of return but it takes nearly 20 years to double if it is only earning 3.7% annually.