Invest In Your Child, Invest in Their Future: ESG Funds and 529 PlansSep 28, 2022
Invest In Your Child, Invest In Their Future: ESG funds and 529 plans
Spencer Kelly & Recha Bergstrom, MD
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 this blog has previously explored, investments that grow your own portfolio may be causing harm to others by supporting unethical companies.
In recent years, “environmental, social, and governance” (ESG) investing has emerged as a 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 post will detail the basics of 529 account and ESG investing before showing, by state, 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 they are usually set up by a parent or grandparent 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 529 plans are legitimized by the federal tax code, the plans themselves are administered by the states. 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 with 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 as well as 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. To get 529 plan info with the availability of ESG investing in each of the 50 states, click here.
Notes and Considerations
Evidently, 529 investment options 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.
It should be noted that 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.
You can be the change you want to see in the world through effective, efficient, and impactful philanthropy. Check out my course, The Physician Philanthropist, for a comprehensive education on and strategy for maximizing the impact of your giving both for you and your causes
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