529 College Plan: Head of the Class

12/06/2002 12:00 am EST


Richard Band

Editor, Profitable Investing

There are few financial issues that are more important to parents than the future college education of their children. With the staggering costs of education, long-term planning is essential, and there are a number of investment programs designed for this purpose. “Which college savings program goes to the head of the class?” asks Richard Band, editor of Profitable Investing. Here’s his assessment.

“If you’ve got a child or grandchild to send to college, take a close look at the State of Nebraska’s Section 529 plan. In addition to being economical, it’s one of the most versatile (and open to residents of any state). With a 529, a couple can immediately salt away up to $110,000 (singles $55,000) in contributions to a tax-sheltered college-savings program for each person you designate.

“Thus, if you wish to help three children, you can set up three plans for a total of up to $330,000, without incurring any gift tax. By contrast, the federal government’s Coverdell Education Savings Accounts allow only $2,000 per year—and imposes strict income limits on donors. State 529 plans like Nebraska’s are free of income qualifications. Both types of plans allow tax-free distributions to pay for tuition, room, board, books, equipment, etc.

“Why Nebraska? Lots of investment options. You can choose from 10 portfolios, made up of a blend of mutual funds from names like Vanguard, Fidelity, American Century, Janus, Pimco, and T. Rowe Price. Four portfolios are age-based: The allocation begins with a hefty stock percentage for an infant and gradually shifts to fixed income as the child grows up. The other six 'target' portfolios let you choose a specific stock/bond allocation, regardless of the child’s age. You can alter your portfolio selection once a year. Charges are reasonable: $30 a year plus 0.85% of the account balance for administration, on top of the mutual funds’ management fees.

“A little-known feature of 529 plans is that you can change the beneficiary—or even take the money back if you need it. How’s that for a gift? There’s a 10% penalty tax when the donor takes cash out of a 529, together with regular income tax. But the tax is levied only against the earnings portion of the account, not on the portion the donor contributed. Before enrolling in the Nebraska plan, visit www.savingforcollege.com to see whether your home state has a 529 plan with any special tax breaks for residents. For an information packet on the Nebraska plan, call TD Waterhouse at 877/498-4644; or steer your browser to www.tdwaterhouse.com, click on Planning, and then on College."

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