What... (i.e. camp, dance class, birthday party)
        
 
Pick a NYMetroParents Region: All Regions   Manhattan    Brooklyn    Queens    Westchester    Rockland   Fairfield    Nassau    Suffolk  

Resources

   

COLLEGE SAVINGS PLANS MAKE THE GRADE

     Home  >  Articles  > Family Finances
by Nicholas J Vertucci

Related:


  

  

   With the cost of higher education continually rising, it’s more important than ever to get an early start saving for a child’s college education.  For parents or grandparents considering the possibilities, state-sponsored Section 529 College Savings Plans may be the way to go.

 

The ABCs

   College Savings Plans allow you to invest significant sums of money that can grow tax-free. You can set up an account for anyone — your child, grandchild, niece, nephew, or even yourself.  These accounts grow larger than an identical taxable account where earnings are taxed every year.  The reason?  Dividends and realized capital gains are not taxed annually and continue to grow within the account.  Additionally, when the money withdrawn is used to pay for qualified education expenses, including tuition, fees, certain room and board expenses, supplies and equipment, it’s free from federal income tax.  Many states also extend favorable tax deductions and tax-free withdrawals to state residents. New York and Connecticut currently offer state residents a $5,000 (individual) and $10,000 (married couple) tax deduction per year; New Jersey presently does not offer a deduction for state residents. Check with your tax advisor on this point.

   Contributions to College Savings Plans are usually invested in one or more predetermined structured portfolios.  Typically, plans include age-based or years-to-enrollment portfolios that become more conservative as the child nears college attendance. Early on, the portfolio will usually hold more stocks; as college approaches, the portfolio will automatically include more fixed income investments in order to reduce the risk of stock market volatility on money needed to pay for college in the near future.  Other options include static portfolios that do not alter their investment allocations over time, and individual fund portfolios that allow for a greater degree of customization.  OF course, the performance of the portfolios depends on market conditions and there is no guarantee that there will be enough money in the account to cover all education expenses.

 

Do the Math

   To fully understand the benefits of 529 plans, compare how they stack up against more traditional plans.  If you’ve started to explore education-funding possibilities, you have probably found that most traditional savings plans come with limitations.  For example, with an Education Savings Account (ESA, formerly an Education IRA), you can only save $2,000 a year — not much given that tuition, room and board can sometimes cost tens of thousands of dollars for a four-year education.  And while these accounts do provide tax-free distributions, parents with relatively high incomes may not be allowed to contribute.

   Custodial accounts present other dilemmas. The child owns the assets since the account is in his or her name, but the latest changes in the taxation of unearned income by minors has been extended all the way through age 18, and up to age 24 for college students! That means you can only hope that your college-bound teen decides to use the money for college, but no matter how the money is spent, much of the investment income will be taxed to you at your highest marginal tax bracket.

   U.S. Savings Bonds are also a popular savings vehicle.  However, these bonds carry modest interest rates.

 

Do Your Homework

   There are a couple of things you’ll want to consider when evaluating 529 plans.

   First, find out about your state’s College Savings Plan.  Keep in mind that where you live may or may not be the best place to invest.  Most states allow accounts to be opened by and for non-residents.  If your state has a College Savings Plan, you should weigh any local tax benefits against the benefits and conditions of plans offered by other states.

   New York’s plan is administered by Columbia Management, Connecticut’s by TIAA-CREF, and New Jersey’s by Franklin Templeton.  But this is not enough information to make an informed decision on choosing a plan.  In addition to state of residency, it is also important to consider the tax bracket of the investor and how much they want to contribute. Columbia Management was recently rated by Barron's (a respected financial publication) as the best overall fund manager over the last five years. Based on that information, an investor in New Jersey, where there is no tax deduction, might consider using the New York plan to gain access to Columbia. However, the New York plan also has a higher initial minimum of $1,000, compared to the New Jersey plan’s $250 minimum.

   If you are already saving within a custodial account, an ESA, or with U.S. Savings Bonds, you may want to explore the tax-free transfer of these savings to a College Savings Plan. 

   Finally, keep in mind that if the funds aren’t used for educational purposes, you’ll face a 10 percent penalty tax on earnings upon withdrawal. 

   Still, many families find the benefits of the plans greatly outweigh any potential disadvantages. Last year alone they invested around $5.5 billion.

 

NICHOLAS J VERTUCCI is a financial advisor and wealth advisory specialist at Citi Smith Barney. For more information: 212-603-6248; [email protected].


Get Your FREE Indoor Activity eGuide!

More Family Finances Articles

Junior Achievement of New York Brings More Than Money® Program to PS 212 in Jackson Heights
The Secondhand Goods Guide for Families
How to Teach Kids Financial Literacy and Money Management
Money-Related Gift Ideas for Kids
Family Finances: How to Open Up Financial Communication in Your Family

Be a good fellow parent and share this with a friend who would be interested
Email Friend

Local Family Finances Sponsors

Léman Manhattan Preparatory School
New York, NY
212-232-0266
Located in the heart of Lower Manhattan, Léman Man...

Chocolateworks/Basketworks
611 Jericho Turnpike
Syosset, NY
516-367-9200
Looking for a delicious gift, a super fun birthday...

Adventurer's
1824 Shore Parkway
Brooklyn, NY
718-975-2748
Adventurer's outdoor Birthday Party Special packag...

Garden School
33-16 79th St.
Jackson Heights, NY
718-335-6363
Garden School is the only co-ed, fully-accredited ...

Power Brain Training Center
567 Jericho Turnpike
Syosset, NY
516-364-3413
The Power Brain Training Center is an innovative B...
See Our Family Finances Directory

local zones

Nassau

Nassau cont.

Suffolk

Suffolk cont.

Westchester

Westchester cont.

Fairfield

Rockland

Rockland cont.

Queens

Queens cont.

Brooklyn

Brooklyn cont.

Manhattan

Copyright 2014 NY Metro Parents Magazine Site Design: THE VOICE