Saturday, June 24, 2000
The Sophisticated Investor
Premium college savings plans available
By John Waggoner
That little bundle of joy in your arms could get a Nobel prize in physics or discover a new species of Venusian rhinoceros. But to do that, he or she will need to go to college. So you should get a Section 529 plan.
Many people don't know about Section 529 plans because they sound like a plea bargain for someone caught with a sack of chickens in a hotel room. But it's actually one of the best deals going for parents who want to send a child to college.
Tuition and fees at the average four-year public school was $3,243 per year for the 1998-99 school year, according to the College Board, a not-for-profit educational association. One year at private college averaged $14,508. Tack on another $4,530 per year for room and board at public schools and $5,765 for room and board at private school.
Attentive to the groans of parents across the country, Congress passed Section 529 of the tax code. It allows two kinds of college savings plans.
The first are the prepaid tuition plans, which let you buy tomorrow's in-state college at today's prices. These can be good deals, but they require that Junior go to schools in your state. And since college cost increases have slowed to about 4 percent, your savings would be relatively low.
The new Section 529 plans let you make regular contributions to a state-sponsored plan. Some states will let you contribute as little as $15 a month, according to Michael Noon, program director for TIAA-CREF's college tuition financing programs. They are accessible to everyone, he said.
You set up the account in your name. The beneficiary can be your child, grandchild, your friend's child, or even yourself. The money will accumulate on a tax-deferred basis until you withdraw it. If the money is spent on college costs, it's taxed at your beneficiary's rate, not yours. In most cases, that's much lower than yours, unless
your child launches an Internet start-up in his sophomore year. Best of all, you can use the money for any qualifying college in the country.
Other reasons to like a Section 529 plan:
ăYou can contribute $100,000 per beneficiary.
ăIf Junior decides not to go to college, another member of your family can use the money.
ăMost colleges consider Section 529 money as belonging to the student, not the parent, which makes getting financial aid easier.
ăMany states offer additional incentives to parents. New York gives residents a tax deduction for up to $5,000 in contributions each year. And if residents use the money for qualified educational expenses, the earnings are free from New York state income taxes. In Minnesota, the state will match some of the money residents contribute to their accounts. An excellent Internet site, www.savingforcollege.com, has the lowdown on all the current state plans.
Currently, 40 states have Section 529 plans, and another eight are considering them. Only Georgia and South Dakota don't have one on the drawing board, said Joseph Hurley, a certified public accountant in Pittsford, N.Y., and author of The Best Way to Save for College A Complete Guide to Section 529 Plans.
If your state doesn't have a Section 529 plan, or if you don't like your state's plan, you can invest in another state's plan. You won't get any state tax deductions, but the other benefits are the same.
So what are the drawbacks? If the money doesn't go to college, you'll owe a 10 percent penalty, as well as federal and state taxes, on the earnings.
Also, you don't control how your money is invested. Most states use an age-based asset allocation system: The younger the child, the more money in stocks, and vice-versa. Most states have a high-powered money managers: Fidelity Investments runs the Massachusetts plan, and TIAA-CREF runs California's plan.
If your child is young and you're an aggressive investor, you might invest your child's money yourself, said Mark Bass, a financial planner in Lubbock, Texas. If you don't mind investing in an aggressive fund, you could end up having more money when your child is 18, he said.
If you want to go that route, five top-performing funds with low investment minimums are:
ăManagers Capital Appreciation (800-835-3879), minus 2.6 percent return 2000, 356 percent return last five years.
ăStrong Growth (800-368-1030), 7.9 percent return 2000, 315 percent return last five years.
ăUSAA Aggressive Growth (800-382-8722), 1.2 percent return 2000, 285 percent return last five years.
ăPreferred Growth (800-662-4769), 5.5 percent return 2000, 251 percent return last five years.
ăStrong Large Cap Growth (800-368-1030), 0.2 percent return 2000, 238 percent return last five years.
The average stock fund is up 4 percent this year, 156 percent the last five years.
But whatever you do, start early. Think of it as an investment ina future Nobel Prize.
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