"Manage The Markets"
A Personal Note..
week we are preparing for a very big day on Sunday. My oldest son, Noah, will
be receiving his first Holy Communion. Even though he is only 8 years old, he
has had so many milestones in his life already. As a mom, I want to see my
children grow and yet preserve as much of the moment as possible to prolong the
inevitable time when he will leave home to go to college. While it was fairly
easy to prepare for this event, college prep is a more extensive process and
often starts as soon as children are born. The first step is to start saving years
in advance for the big event. The big question is how do you do it? Wall
Street had once again come up with a product to address the need with all the
bells and whistles (and, of course, lots of fees!) to address this need. The
product I am referring to is a 529 Plan. Is a 529 Plan right for you? Are
there cheaper and better alternatives? Today's newsletter takes a look at the
different options available for college savings. Please call with any questions
you may have!
Catherine Maniscalco Avery
CAIM specializes in creating and managing customized and fully diversified investment portfolios for private investors.
The truth about 529s and other college savings plans
For those of you with kids'
college looming on the horizon, a recent Morningstar Analysts' article
entitled: "Alternatives to 529
College-Savings Plans," offers some great insights.
Aren't 529s the best college savings
vehicles out there, you might ask? Well,
yes and no, as the article points out.
The best of 529s are available
at the state level, to all income levels, with attractive tax savings, lower
fees and more flexible investment options.
However, many states still offer poorly constructed plans, and no amount
of tax incentives can compensate for those 529's lackluster returns and layers
of fees. Plus, if your child opts out of
college, or you have leftover assets once they've graduated, all 529s require
that you pay taxes and a steep penalty before claiming your money.
At CAIM we are always looking
for ways to lower our clients' fees and create the most flexibility in
investments - which is why it seemed like a good idea to discuss the pros and
cons of college investments.
So let's look at a few
savings vehicles are not limited to college and grad school expenses but can
pay for everything from kindergarten on up.
Coverdells also offer a wide range of investment choices, from CDs to
Contributors annual income must be below a specific minimum (currently $220,000
for married filing jointly.) States
don't offer tax deductions for Coverdell accounts, you cannot add to your
assets after the beneficiary turns 18, and the beneficiary faces taxes and a
penalty if assets aren't distributed by the time they turn 30. Also, and unfortunately, unless Congress
takes action, contributors will only be able to sock away $500 a year starting
in 2011, while the primary and secondary education benefits currently offered,
Interest earned in good, old-fashioned US saving bonds is not taxed at the
state level. Series EE or Series 1
savings bonds are not taxed at the Federal level either. There are also no annual account maintenance
fees. If your student does not go to
college, you pay only federal income tax on the interest, no penalty fee. US
Savings Bonds are a safe investment vehicle backed by the US government.
offer low returns and are limited to folks under certain income levels.
Investors have complete control over their investment decisions and can stack
their portfolios with best-of-breed mutual funds. Investors will incur some expenses but not
the layers of fees associated with 529s or Coverdells.
you stick with tax-exempt bond funds, or rely on successful, tax-conscious
funds, you will pay taxes on your investments.
interest on a home equity loan is tax deductible. Plus, unlike 529s and Coverdells which can
mean less financial aid, relying on a home equity line of credit means the loan
shouldn't come into consideration.
Cons: The real
estate market is not great now, so be careful about taking on another loan, or
you could find yourself with two loans, a cheaper house and a painful,
Roth IRA allows you to withdraw assets without penalty prior to retirement. If your child ends up not going to college,
or receives a scholarship, or you have money left over in your Roth after
paying for college, you'll be able to use that towards retirement.
reducing your retirement assets. You
also won't receive a state tax break on your IRA contributions, unlike a 529.
don't need millions to set one up. It
protects the money incase of catastrophe and there is no penalty if the money
isn't used for education.
Cons: Lots of
Borrowing against a life insurance policy,
financial aid, scholarships, loans, state schools & community colleges.
As you can see, the 529 is far
from the be-all and end-all when it comes to saving for college. Why not look into some of these other
options? There may be one, or a
combination of several, that works best for you. If you're not sure, have a conversation with
your financial advisor or your accountant.
See you in two weeks with more updates and news!
This information is copyrighted May 2009.
For those of you with questions, feel free to call me at 203.966.2712. Also please visit my website at www.catherineaveryinvest.com Please pass along this newsletter to friends and family to spread the word!