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.

Plans vary by state. Named for an IRS tax code, 529 plans

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,, which contains charts that analyze and compare

all of the different state plans.

New Jersey’s plan includes a scholarship. New Jersey


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



Reasons to go outside New Jersey. Maximum allowable


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.

The 529 plans are a lock. When a parent or grandparent

(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.

Beneficiaries can change. While investors funding a


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.

Lump sum investments are allowed. Investors can put


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.

The 529 plans cover more than tuition. Money invested

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.

It is an understatement to say that 529 plans are complicated.

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.

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