Saving for College is Getting Easier
By Bob Moeller
WEAC Member Benefits
December 2001
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It is time to review the best way to fund your own future college education
or that of your child or your grandchild. The new tax law just put into
place significantly changes the “funding future education costs”
outlook. Because of this, financial advisers are leaping into the fray,
eager to make their 3½% or equivalent of everything you invest
by “advising” you. But you can easily do it yourself for free.
So let’s save that 3½% for your college education fund.
The Section 529 program in Wisconsin is named EdVest, and in order to
save the commissions, you must deal directly with the Strong funds, not
through your friendly financial advisor. You or others (grandparents,
etc.) can set money aside to fund future college costs for you or your
children and invest it with a great no-load, no sales charge, mutual fund
family – the Strong Funds of Milwaukee. The availability of the Strong
Funds is fairly recent and is a really great improvement. Add to that
the major change in the new tax law for 2002 – funds invested grow
with no taxes and then when withdrawn for college expenses there are no
longer any federal or state income taxes to pay on the growth! Plus, applicable
for 2001 and future years, add this clincher – any money you invest
for your own children up to $3,000 per child per year is tax deductible
on yourWisconsin income taxes. Imagine these examples:
- You graduate, start working, put money in EdVest to fund your master’s
degree. You intend to start immediately on it (of course) but it will
take a few years. You invest conservatively, start using the funds in
two years, and any growth is totally tax-free.
- Your mother wants to start a little fund for her new grandchild to
go to college. EdVest will work better than I-bonds, E-bonds, etc. The
funds may be invested more aggressively, and 18 years later a lot is
available with no taxes due. Grandma can contribute up to $50,000 into
the fund for each child with no gift taxes. (Effectively she is using
five years’ worth of the normal $10,000 per-year gift limit.)
What if the college attended is in Texas? No problem. What if the child
doesn’t go to college? No problem, the funds can be shifted to another
child, left to sit there invested in case the child changes his or her
mind, or even withdrawn by you and spent on non-educational expenses,
albeit with taxes and a tax penalty.
If interested, contact EdVest / Strong Funds at 1-888-338-3789. Tell
them what you want to accomplish, and they will send you information and
help you with any problems you have. They do not give investment advice,
but your choices are listed below. You can open more than one account
for a person and have different investment choices in those accounts.
You can change your investment choices once per year.
Your choices are:
- Aggressive portfolio
- Moderate portfolio
- Balanced portfolio
- Index portfolio (100% in the S&P 500 index)
- Bond portfolio
Or, you can choose the age-based option that will automatically change
investments as the child nears college.
Total possibilities are:
- 10+ years until college (aggressive)
- 7 to 9 years until college (moderate)
- 3 to 6 years until college (balanced)
- Less than 3 years (bond)
You can set up different accounts with separate deposits and effectively
have more than one option. Or, if you select the age-based option, the
investments automatically change.
In my opinion, the Section 529 plan, now that the federal taxation of
future growth has been eliminated, is the best choice for your children’s
college fund. Incidentally, if you have really rich grandparents involved,
the maximum contribution is up to $246,000, presumably based on typical
costs at an expensive private school like Harvard. Note you can make periodic
contributions such as once a year in order to get the tax write-off.
Grandparents cannot get the tax write-off, only parents. One way to deal
with grandparents’ contributions is for the grandparents to give
money to the parents and parents deposit it into the EdVest Wisconsin
Program. Again, up to $3,000 per child per year may be deducted from state
taxes if done this way.
Posted December 4, 2001