|
Does New Jersey have a plan?
Yes, in fact there are two plans, one for savings and one for
pre-paid tuition. Under the New Jersey savings plan, (NJ Best) you can invest up to
$185,000 per child in a 529 savings plan. NJ Best earnings are exempt from both state and
Federal tax. At this writing, there are five
different programs, which are age-based investment plans with varying degrees of risk (the
older the child, the less time to invest and the more conservative the investment
allocation.)
To qualify for the NJ Best program, either the account owner or the
beneficiary must be a New Jersey resident, however the funds may be used in either an
in-state or out of state institution. There
are additional incentives for attending a New Jersey school, though. The state provides up
to $1,200 in tax-free scholarships when plan recipients attend a New Jersey college or
university.
Pre-paid tuition is another way for families to lock into savings.
Under this plan, participants select a college
they plan to attend, and lock in at today’s tuition rate. Then, they pay either
monthly or in a lump sum the current tuition.
If
your child, nephew or grandchild still has five, ten or more years before college—and
ultimately decides to attend a New Jersey school—they will attend at what is likely
to be a significantly discounted, pre-paid price.
The
downside, of course, is that the return on your investment is poor if the child decides to
attend another school.
Recent changes in the law provide pre-paid options for certain
private institutions as well.
What are the differences between each state's plan?
The differences are many. Primarily, state plans will vary in the
following key areas:
- per child investment limit
- state income tax deduction availability
- the annual cost of the all stock portfolio
- minimum contribution
- investment allocation
- investment risk as well as "guarantees"
- investment options based on age
- penalties for withdrawals and other fees
- overall user flexibility with regard to investment selections
Some states are virtual clones of other state plans, yet others are
quite unique and flexible. For example, the Rhode Island CollegeBoundFund Plan
offers a per child maximum investment limit of $265,620, approximately $80,000 higher than
New Jersey. Some states manage their own funds, while others have well known investment
firms do the work. State-operated investment appear to offer lower fees than their
for-profit neighbors, but their investment management styles are bound to just as
different.
Plans also differ in the available options regarding allocation and
investment type. There are many age-based programs (the younger the child, the more risk,
and thus higher potential return) and some offer only fixed allocation plans from one
source. As the popularity of 529 plans begins to grow, states are adding more and more
optional choices for investors, including more conservative plans that address the
concerns of savers who are not risk takers but want the advantages of tax free college
savings.
Of course several states offer inexpensive plans, including New York,
which also offers a partial state tax deduction, but its plan has a low maximum per child
($100,000) and levy's a penalty for withdrawals taken prior to the first 36 months in the
plan.
Other states, like Nebraska, offer several different plans from
varying banks or investment houses. Yet others--including New Jersey--offer pre-paid
tuition options for students who stay within the state.
Parents or grandparents do not have to select a state plan from the
state where they live; although some states require at least one party (the saver or the
student) to be from that state, some plans are open to everyone. For the most part,
families are free to select from the state plan that offers the most appropriate
investment strategy and options for their needs. So a family here on the east coast could
opt to build a 529 plan for their children using a plan sponsored or managed by a
mid-western or southern state, if their advisor recommended that strategy.
Who would benefit?
Your child, yourself, spouse or any relative you would like to
name as a beneficiary. The flexibility in changing beneficiaries later makes this an
excellent estate planning tool. If children do not attend school, grandchildren can be
named in their stead.
Can I change the beneficiary?
Yes. If a child decides not to attend college, beneficiaries can be
reselected to another family member.
What are the advantages?
Tax free income from the investments to use for school expenses.
Are there downsides to this savings plan?
There are several reasons why 529 plans must be reviewed and
considered carefully before jumping in with both feet. The obvious risk is that the
investments chosen by your plan do poorly, and your account loses money. For this reason,
individuals or their advisor must chose a plan that meets the risk tolerance of the
individual.
If the recipient is likely to be eligible for other aid or
scholarships, the money saved in the 529 plan is included in the financial statement, and
can possibly push an applicant above the income/assets threshold limits for some grants or
financial aid programs. For this reason, 529 plans must be carefully considered. If your
income situation is such that financial aid is likely to be available for your child, or
if other investment situations avail themselves (such as a large pending gift from an
elderly relative or grandparent) you may want to take advantage of the tax savings
possible with the 529 savings program. Conversely, if the anticipated savings from a
529 plan are not likely to force your child out of the running for needed financial aid,
it may be a worthwhile investment option.
Another drawback of a 529 plan is when a non-qualified withdrawal is
taken. Besides owing federal and state taxes on the earnings, you will face a 10% penalty,
similar to an IRA plan penalty.
How much do I need to get started?
Not much. Plans differ, but essentially, a small deposit, minimum
monthly payments into an account of as little as $25 or $50 can get you started. Some
states have minimums of $1,200 to $2,500 to set up a plan.
In the New Jersey Best plan, minimum contribution options include $300 a
year for the first four years, or $1,200 at the time the account is opened. There is a $5
annual maintenance fee.
What happens if the recipient decides against college?
One of the very nice features of the 529 Savings Plan is portability.
If one child does not attend a college, the funds can be re-designated for another family
member, including a spouse, cousin, niece or nephew.
How do I start?
The smart way to start is to talk to a professional who can discuss
your overall financial situation and help you assess your best options.
Hunter
Group has expertise on staff
to help you if you wish, and you can feel free to contact us to set a meeting to discuss
your questions, concerns and desires regarding college and retirement planning.
For more information, contact our Marketing
Department at 1-201-261-4030, extension 9823.
Note: The above is provided for information purposes only
and is not an endorsement of any particular investment or strategy. You should only make
an investment decision once you have carefully considered your total financial situation,
and preferably with the advice and good counsel of your financial advisor, and, of course,
your favorite CPA firm. With that in mind, Hunter Group would be happy to
talk to you about your interest in 529 plans. Please contact us to arrange a visit. |
