Corrections or additions?
These articles by Kathleen McGinn Spring were prepared for the May
23, 2001 edition of U.S. 1 Newspaper. All rights reserved.
Tax-Deferred College Savings
There probably isn’t a college course called Saving
for College 101, but perhaps there should be. It is a complicated
subject that raises many questions. Among them: Under what
can junior blow the college fund on a Harley? Will Susie’s opportunity
to get financial aid be comprised by a fat college savings fund?
A college savings vehicle that remains in the control of its owner
— typically a parent or grandparent — and therefore is not
at the mercy of a youngster’s urge to splurge is the 529 plan. Whereas
money in a child’s name under the Uniform Gift to Minors, another
popular college savings plan, belongs to the child, who can use it
for anything he wants when he reaches age 18, parents don’t have to
worry about college cash going along with their progeny on a trip
to Tahiti with the 529.
With the 529, however, parents do have to worry about losing out on
financial aid. When money is drawn out of a 529 to cover college
the earnings portion is considered income for the student. And
aid formulas typically reduce a student’s aid by 50 cents on every
dollar earned. Families earning $75,000 or less can typically qualify
for financial aid at a private college, and families earning $50,000
or less typically qualify at public colleges.
Douglas Roberts, a financial consultant with Gibraltar
Tucker Anthony, in Florham Park, speaks on 529 plans on Wednesday,
May 30, at noon at a free information luncheon at the Sheraton Tara
Parsippany Hotel. Call 973-822-2500.
Roberts says his clients aren’t concerned about financial aid, but
rather are worried about covering their children’s college costs.
For a child born this year, it is projected that room and board at
a public college will run to something like $130,000 for four years,
and that the tab at a private college will be $320,000, or somewhat
more for the most elite schools.
Even so, Roberts admits that for families with relatively low income,
a 529 might not be a good idea. That is especially true where a child
is approaching college age. With a very young child, there is always
the chance that family income will increase substantially, or that
financial aid rules will change. But a family in the 15 percent
is taxed at the same rate as their child, and has greater investment
flexibility outside of a 529 plan.
Still, for many families, even those where parents are in a low tax
bracket, the 529 is an attractive proposition, and may become much
more so. Money invested in 529 plans now grows free of federal tax
— and free of state tax in most states, including New Jersey,
but is taxed when it is withdrawn. Under legislation introduced in
Congress last month as part of the Affordable Education Act, money
not only would grow tax free in a 529, but would be free of taxes
when it is withdrawn and used for college costs.
Here is how a 529 plan works, and why it may, or may not, be a good
way to build up a college fund.
are administered by states. Some 44 states have 529 plans, some open
them only to their own residents, and others welcome any investors,
but may not give all of the plan’s benefits — scholarships, for
example — to out-of-state residents. Rules are different for each
plan. An excellent source of information on 529 plans is a website,
SavingForCollege.com, which contains charts that analyze and compare
all of the different state plans.
can invest in plans offered by other states, or can choose their own
plan, which is called New Jersey Better Educational Savings Trust.
The maximum contribution to this fund is $150,000. It can be opened
with $25, and requires a $300 annual contribution until the fund
$1,200. There is a $5 annual maintenance fee, and a maximum .5 percent
investment management fee charged by the Division of Investment. An
attractive feature of the New Jersey plan is that it awards
of between $500 and $1,500 to all beneficiaries whose funds have
contributions for at least four years, and who enroll in any New
differ from plan to plan. CollegeBoundfund, the fund Roberts’ firm
promotes, for example, allows a maximum contribution of $246,000.
Also, investors have just one choice of investment in the New Jersey
plan. All money is invested under an age-based strategy using five
age bands. Beneficiaries under 2 years old have 60 to 80 percent of
their money in stocks, while those over 14 have zero to 20 percent
in stocks, and the rest in fixed income investments.
Roberts, whose product offers five choices of investment strategies,
says the age-based strategy is the most popular now, especially since
the recent stock market unrest jolted investors who had put their
faith in aggressive mutual funds. Still, some investors may prefer
a plan that offers more choices.
One more consideration with the New Jersey plan is that the fund
to the beneficiary, or his guardian, should the owner die, whereas
some other funds would allow another person, perhaps the decedent’s
spouse, to inherit.
(or cousin or uncle or godmother) opens a 529 plan, he chooses how
the money will be invested. And that is that. No changes are allowed.
Given changes in investment mentality that typically occur in the
two decades between the time a child is born and is half-way through
college, that could be a problem.
college costs through a 529 plan are locked into their initial
choice, they can name a new plan beneficiary. If Junior decides to
go straight from high school to Broadway or to launch his own business
and skip college, money in his fund can be transferred to his sister
However, if the money, for whatever reason, is not used for college,
there is a 10 percent penalty upon withdrawal in addition to taxes.
apiece in each beneficiary’s fund at one time. That means that a set
of grandparents could put $100,000 into each of their grandchildren’s
funds in one fell swoop, removing an enormous amount of money from
their taxable estate. Anyone making this lump sum investment can not
put any more money into the 529 funds for five years. Otherwise, each
investor can put up to $10,000 a year in each fund. Many people can
open funds for a single beneficiary, but the total amount allowed
in all of the accounts is capped.
in 529 plans can be used for tuition at any college, trade school,
or graduate school in any state. It can also be used for room and
board, fees, books, and supplies.
Potential investors need to consider everything from possible changes
in federal estate tax laws to the rate of inflation to the possibility
that the twins will be accepted at Harvard, and while there will
to become neurosurgeons. But however much uncertainty surrounds the
wisdom of starting a 529 plan, as opposed to investing in another
college savings vehicle, one thing is sure: The cost of college, now
at $30,000 a year at some schools, is only going in one direction.
Corrections or additions?
This page is published by PrincetonInfo.com
— the web site for U.S. 1 Newspaper in Princeton, New Jersey.