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American Morning
Section 529 Plans Save For College Tax Free
Aired December 24, 2001 - 09:31 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
MILES O'BRIEN, CNN ANCHOR: Holiday shopping tends to bring personal finance into focus, especially when money is tight, as it is for many people. But getting control of your money is vital, especially if you have a child or two to put through college.
Terry Savage writes a column on personal finance for the "Chicago Sun-Times." She joins us with some timely strategies for building a college fund. Terry, good to have you with us.
TERRY SAVAGE, "CHICAGO SUN-TIMES": Good to be with you, Miles.
O'BRIEN: All right. I've got a boy, 9, and a girl, 7. How am I possibly going to pay for college?
SAVIDGE: A lot of parents are wondering that. This year the very best college savings and investment yield just got better. I'm talking about Section 529 Plans, and it's also a last minute gift idea, where you won't have to go to the mall.
I'll show you how to do it right on your computer today and so you'll have a gift for your child or grandchild tomorrow. 529 Plans are college savings accounts. This year, Congress passed a law that says that all the money you invest in them comes out completely tax free if you use it to pay for college expenses. Now, just about every state has started one of these plans. You don't have to join your own state's plan unless they give you some kind of a tax break.
You can put the money aside for a child, but it can be used by another child in the family, and it can be used for college in any state in the country. So 529 college investment plans are terrific.
O'BRIEN: Yeah. My accountant has been pushing this idea -- this 529 thing. He said the big difference here is that you don't have to give the money to the child. Which, of course, can be risky. Because they might not -- they might decide to buy that Harley Davidson and see the world, right?
SAVAGE: Absolutely. With the Uniform Gift to Minors Act, those custodian accounts, the money actually belongs to the child when the child turns 18. So you thought it was for Princeton, she thinks it's a Porche or a Harley or whatever, it belongs to the child. But with a 529 plan, the donor retains control of the money. And if one child doesn't go to college, can switch it to another or can dole it out for any purposes for college. So the parent or grandparent who sets up the account retains control.
An interesting quirk on this now for wealthier grandparents. The money is actually taken out of their estate for estate tax purposes. So they get it out of their estate but retain control. If they give a lot of money, and it grows over the years, you might need some back later on, you'll just get it back with a 10 percent penalty and paying income taxes on the gains.
But, for most parents who have young children, the idea that you're going to put this money in every year, extra money at birthday time. It's a gift that keeps growing. Most of these 529 plans will let you start out with as little as $50, if you agree to sign up for an automatic monthly deduction.
And grandparents can put a whopping $50,000 each into a plan, if they're so inclined, and still have control. So, Section 529 plans and -- as I started to say, you can do this today. There is a wonderful web site called savingforcollege.com. And it's, sort of, the association that tracks all the different state plans.
So, if you go to savingforcollege.com, you can click on your state's plan or compare it with other states' plans. You could actually, print out the state page and then attach a check to it, and get started setting up the plan. You might not get it actually done til the end of the year. No deduction for starting this plan, but all of the money, remember, grows tax free if it's used for college.
O'BRIEN: All right. Maybe I'm missing something, Terry, but, you know, if it sounds too good to be true, that's supposed to be too good to be true. It sounds like there's not a down side here. Is there?
SAVAGE: There is a bit of a down side. Now, I've been saying that it's almost too good to be true. I just can't imagine that Congress did this wonderful favor for parents and grandparents. Of course, you're investing in mutual funds that each plan selects. And of course, as we've all learned, there's a down side risk in the stock market.
But many of these plans say, "we know you're not experts, so just tell the us the age of the child right now, we'll make the investment decisions, as the child gets older they might invest very aggressively for a two or three year old, a little more conservatively by the time the child is 15 or 16, the investments get more conservative, so they're called age-based investing. Yes, there's stock market risk in this, but if you have the long run, and with a nine-year-old for instance, you're going to have at least 10, 11, 12 years before the last of that money is used. I believe that, over the long run, you'll come out ahead investing in the market.
O'BRIEN: All right. Saving for college for dummies like me. I appreciate it. Terry Savage with the "Chicago Sun Times." Sounds like a turn-key operation. A "no-brainer," as they say. Merry Christmas to you. Thank you for joining us. We appreciate it.
SAVAGE: Merry Christmas, Miles.
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