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CNN Sunday Morning

Interview With Roben Farzad

Aired August 11, 2002 - 09:15   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

FREDRICKA WHITFIELD, CNN ANCHOR: You get what you pay for, as the saying goes, and if you want your child to get a top-notch education, it's likely it will cost you. Joining us now from New York to tell us about one way to save for the big event is Roben Farzad from "Smart Money" magazine. Thanks very much for joining us. Good morning.
ROBEN FARZAD, "SMART MONEY" MAGAZINE: Good morning. Good morning, Fredricka.

WHITFIELD: All right. So one of the best ways instead of trying to squirrel something away in a savings account, and you end up dipping into et cetera, but how about this 529? There are a few options with a 529 account, aren't there?

FARZAD: Yeah, the 529 basically comes in two flavors. You have the prepaid tuition program, which a lot of you are familiar with, state to state, where you can lock in the price of in-state public university at current rates to send the kid to school in however many years. But the second one is really worthy of more focus. It's called the college savings plan, where you can tuck away a substantial amount of money without taxes eating away at it, and when you finally withdraw it for educational purposes, there are no taxes at that point either. So it's very attractive for most...

WHITFIELD: That's very good. Now, is everyone eligible? All you have to have is a kid in order to open one up, or can you start your planning on college education even before you start your family?

FARZAD: Yeah, you have to have a designated beneficiary, but the good news is that grandparents can get in on it, father and a mother can do this jointly, I think, in one fell swoop, if you want to combine five years' worth of combinations -- I'm sorry, contributions. You can get it $110,000, protected for taxes. And if you know about the power of compounding, over, say, a five-year, 15-year period, that turns into a substantial sum.

WHITFIELD: Wow. Now, what happens if in the case your child decides after you've saved all of this money, your child decides, you know what, I don't want to go to college, or perhaps they get a full scholarship. So what do you do with those funds that you've saved?

FARZAD: Yeah, there's always that possibility that your kid's the next Kobe Bryant, or maybe he wants to join the Hari Krishna (ph) or something, but if that does happen, the good news is that it's transferable to a sibling. If it's a grandparent that's contributing to the account, you can transfer it to one of that -- one of those kids' cousins. So that the great news.

And in many states, the big caveat here is that the states ultimately control this savings plan. You can use it for your own mid-career educational purposes. But if you do have to withdraw it for non-educational purposes, the bad news is that there is a 10 percent penalty in the majority of cases, and you have to pay taxes on the investment gains in that account.

WHITFIELD: And you can open it up with anything, or is there a minimum and is there a minimum or a maximum per year of contributing to that account?

FARZAD: In the college savings plan, most states, once again, I'm sorry to hit on that point, but some states are in the 16th century on this. Other states like Wisconsin are very ahead of the curve. Let you contribute up to $11,000 a year, per spouse. That's, you know, $22,000 a year. Think about that over a five, 10-year period. And if the grandparents get in on this also, there's great news in that they can prevent estate tax exposure.

WHITFIELD: All right. Roben Farzad, thank you very much, from "Smart Money" magazine, for joining us this morning.

FARZAD: Thank you, Fredricka.

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