Taking Stock: Saving for your children's future

Dear Mr. Berko:
We have 10-year-old twins (a boy and a girl), and our broker is pushing us hard to invest in a 529 plan for each twin. We would begin with a $4,000 investment in each plan, then make monthly investments of $250 for each child. We know that college costs continue to increase, and we want to do the right thing. Please give us your opinion of the plan, the tax savings and the advantages or disadvantages. We anxiously wait for your reply.
 W.H., Aurora, Ill.
Dear W.H.:
There are two types of 529 plans: (1) prepaid and (2) savings; however, most stockbrokers will not recommend prepaid plans. Prepaid plans allow Mom and Dad to pay tuition costs upfront at today’s tuition rates even though Junior plans to attend college 10, 15, or 18 years in the future. So your gain is the difference between today’s cost and the cost of college 15 years hence. 

Most stockbrokers recommend savings plans, in which your gain is based upon the performance of the underlying investments you chose, which are usually mutual funds. And for the past 10 years, I’ve been saying, “Bah humbug!” I don’t like 529 plans and never did, and I don’t know of a single reader who has had the good fortune to pay his lad’s college costs with a 529 savings plan. 

Your broker’s advice will pay him well, but serve you very poorly. I recommend that you give your broker one of those new cell phones that explodes during a solar eclipse, then call him when the moon next passes between the sun and the earth. So look at a prepaid plan that can be funded immediately or in installments. I don’t like to gamble with important money, and believing you can pick several mutual funds – the values of which will increase sufficiently to pay Bonnie and Clyde’s college costs – is farce and folly. If the investment climate during the next 10 years is representative of the last 10 years, your kids may have to settle for a degree by mail. 

To get started, I suggest you call the College Illinois! 529 Prepaid Tuition Program on their toll-free number, 1-877-877-3724, and they will walk and talk you through the details.

Please know that your contributions are NOT deductible from your federal tax liabilities, as most folks believe. However, many states, including Illinois, provide state tax deductions for part or all of your contributions. 

However, you would do well to grossly underestimate the plan’s tax savings. And as long as the funds are vested with the state, you have control over the money. 
Meanwhile, the funds can be used for tuition, fees, books, supplies and room and board as long as Bonnie and Clyde remain students. Off-campus housing costs are covered up to the allowances for room and board that the college includes in its cost of attendance.

But did you know that everyone is eligible to take advantage of the 529 plan, and the dollar amounts that can be invested are quite substantial: more than $300,000 per beneficiary in many states, and there are no income or age restrictions. And even though the money can be reclaimed by the donor (you), the funds are not counted as part of your estate for tax purposes. 

As a result, some clever tax lawyers use the 529 plan as a conveyance to remove assets from your estate while you still retain control, if you need the money for your future use. A tax lawyer should be able to give you the specifics and will know enough to give you the proper advice. Of course this not what the plan was intended for, but it is certainly one of the many egregious examples of how a corrupt Congress was encouraged to manipulate the tax laws to favor a few large campaign contributors.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate Web site at www.creators.com.
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