I don’t know where I went wrong. I live and breathe financial management. I have stood on the rooftops and screamed the virtues of fiscal responsibility. But in my own household, I’m a failure.
My daughter is in college. She is constantly on the brink of financial disaster. Her overdraft charges, alone, could feed a family of four in Afghanistan. She doesn’t balance her checkbook. She doesn’t keep up with her ATM withdrawals. She takes trips out of town and wonders why some deranged store clerk refuses her credit card. I’m beginning to think there was a mix-up at the hospital.
Then I remind myself that she’s still young, still in school, still not in the real world. Life will catch up to her.
In the meantime, there is tuition to be paid, books to be purchased, and a meal ticket to go unused. It’s college, the most expensive time of her life… and mine. If you’re even thinking about having children, you need to start thinking about paying for their education. It’s not cheap. Not only are you paying for an education, but you are, essentially, supporting another household. You’ll need to use every avenue available to help with the cost.
One new avenue created by Congress is the 529 College Savings Program. These state-sponsored programs give families a way to put aside large sums for higher education. Prepaid college tuition programs cover only tuition and fees. Education IRAs only allow $2,000 per year contributions (beginning in 2002). Custodial accounts can hurt financial aid prospects and offer little tax advantage.
But the 529 programs offer flexibility and tax advantages that may be appealing to many family members when looking for a way to save for college. First, the annual contribution limit is $10,000, and this applies to each individual and each beneficiary. So, Grandma and Grandpa can give a total of $20,000 per year to each grandchild. They can even make a lump sum contribution of $50,000 ($100,000 for both), spreading their $10,000 contributions over five years. And the donor is not limited by his income when making these contributions. There is a lifetime contribution limit, though.
When setting up the account, you must choose how the funds will be invested. These are savings/investment programs. Unlike prepaid college tuition programs, there is no guarantee. They are not backed by the full faith and credit of your state. The performance of the investments determines what is available for school.
And the funds must be used for the named person’s education. There is a penalty for spending the money on something other than this cause, but, if Junior decides to move to a commune, you can transfer the account to another family member.
Then there are the tax advantages. Contributions may not be tax deductible, but, starting in 2002, all withdrawals are free from both federal and, in most cases, state tax. This means they work much like Roth IRAs, with all growth and distributions sidestepping the IRS. Many people are electing to use these in estate planning since they allow for the gift that keeps on giving. Grandparents can lower their estates by making regular gifts, ensure their grandchildren’s education, and avoid the tax on the account. It’s a win-win situation. Hey, forget the grandkids. Get them to set up one for your graduate school. There is no age limit on these accounts.
The State of Mississippi’s 529 program is called “MACS,” and it is managed by a reputable firm called TIAA-CREF. You don’t have to be a resident of the state to open an account. You can use another provider to set up a 529 through another state’s program, but a benefit of using MACS is that your contributions can be deducted from your state income tax (up to $10,000 per year per individual filer). Now we’re talking tax deductibility and tax-free growth.
If you use MACS, you must select one of three investment choices offered by TIAA-CREF. That’s the downside. You may not like these choices and think you could do better with another provider. That’s the trade-off. Investment companies are scrambling to offer 529 accounts to the public. You may choose to use Putnam or A.G. Edwards or Vanguard, to name a few. Beware of hidden costs like commissions, and remember you will forego the break on your state income tax with those contributions.
While the tax advantages are great with these 529 plans, the investments are only as good as the managers. In addition, there are extra costs to participate. Make sure these are reasonable. Congress has given us a great vehicle to help with that college education. It’s up to us to make sure we fund it wisely.
Nancy Lottridge Anderson, CFA, is president of New Perspectives Inc. in Clinton, (601) 924-9828. Her e-mail address is firstname.lastname@example.org, and she’s online at www.newper.com. Her column appears frequently in the Mississippi Business Journal.