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Show DAILY C10 HERALD Sunday, September 9, 2007 THE WALL STREET JOURNAL 529 Plans: Lower Costs, Better Choices By to 529 college Improvements and changes in have made these programs the clear choice for most families saving for higher education. In recent years, as the assets in 529 accounts have grown, many states have negotiated with investment providers for lower fees and better investment choices. The plans also received a boost from the Pension Protection Act of 2006, which made permanent the federal did not tax benefits of 529s-- but extend some benefits of Coverdell education savings accounts. At the same time, more famines using custodial accounts to save for college are facing higher taxes with a recent expansion of the "kiddie tax." SPECIAL vestments, says jumped into the 529 market in the last year. "We're seeing people put money into 529 accounts rather than custo- Savings The 529 plans, named for the section of the Internal Revenue Code under which they were created, were first established in the 1990s. They took off in popularity after a 2001 tax law provided that Hey-woo- 529 plans 19 Re- flows best and worst 529 college savings plans DweKlug INVESTMENT PROVIDER Scholars Choice Legg Maryland College Inv. Plan T.Rowe Price Trust Corp. in Boston-- up from $90.7 billion at the end of last year and $68.4 billion at American Funds INVESTMENT PROVIDER Alabama Higher Education 529 Van John Hancock Freedom 529 Missouri MOST AIM & Vanguard THE WORST Nebraska Bank Union year-en- Kampen "" Upromise West Virginia Cornerstone SMART529 Hartford West Virginia Leaders SMART529 Hartford '; Momingstar's annual assessment was released March 1, before the Introduction of a new Illinois plan that the research firm has since written Note: favorably about .... , . . v .. Love & Money stock-mark- ment options offered AIM College Savings invest-time than ments. Investments in the Ohio CD program, which is available through Fifth Third Bancorp, more than tripled in the last year to over $66 million. Other states that have or are working on CD options in- 2005. d Mutual funds are the primary invest-- , John Hancock 529 Advisor gains, assets are likely to reach nearly $112 billion at the end of this year, estimates FiResearch nancial Mason Colorado Alaska and also investment Momingstar's choices for the CollegeAmerica Investors should then compare the home-stat- e plan to other offerings. In some cases, they may decide to go with a better performing plan with lower costs from out of state. That's what Illinois resident Mark Merlet did early this year, before that state's new program was introduced. He compared a number of plans for his two young sons and chose a T. Rowe Price Group plan in Alaska because its performance and fees were better than the plan that was then available in Illinois. In going with the Alaska plan, Mr. Merlet gave up a substantial deduction on his Illinois return. He says he would consider opening an Illinois account in the future, now that his home state's program has lower fees. Consumers also need to decide In March, OppenheimerFunds became the new program manager in Illinois, introducing even lower fees. That state's Bright Start program, offered directly to investors, has index portfolios with fees ranging from 0.2 to 0.23 and actively managed portfolios ranging from 0.38 to 0.63. d (Most 529 plans now offer investments, which automatically become more conservatively invested as the child gets older.) Meanwhile, some states have added or plan to add federally insured bank products to their 529 lineup. For conservative investors, these offer guaranteed returns, but may deliver lower returns over in states. flecting those in- Picks and Pans Virginia Take Time to Compare Fees Dip Even Lower which has 20 Educational Savings plans.) introduced aged-base- d portfolios in California with annual expenses of just 0.5 of assets a year. The underlying holdings are all index funds. Indexing giant Vanguard Group followed with fee cuts to its Nevada plan, bringing half of the investment choices to that same 0.5 expense level. dial accounts," says John a principal at Vanguard Group, Nebraska College Savings plan. (States including Maine, Kansas and Pennsylvania have begun to pass on those benefits to resi529 dents who invest in - dial accounts.) THE BEST an be- inof cause creased pressure from states," Brian Boswell, an analyst at Financial Trust Authority COLLEGE SAVINGS: Research. "The and chairwoman have plans of the College Sav What You Need to Know evolved to the where point ings Plans Net- work, an association of state 529 they're much higher quality than even two or three years ago." plans. Indicative of a price war, within Families, many of whom were the last year Fidelity Investments using other savings vehicles, have the accompanying story for more on Coverdells and custo Utah more expensive investment providers with lower-cos- t options. "Typically REPORT what you're seeing is better in- pension legislation, that federal tax provision would have expired by 2011. "The Pension Protection Act eliminated a lot of uncertainty," says Jackie Williams, executive director of the Ohio Tuition Joe Hurley, founder of an independent Web site that provides information about 529 plans, says families should first consider their own state's plans. That's because more than 30 states offer tax or other benefits to residents who invest in high-price- d taxWithout last year's (See Tax-Fre- e ment research firm Morningstar. States have eliminated some of the plans and replaced money withdrawn from the plans to pay higher-educatio- n expenses would be free of federal income Jilian Mincer within 529 plans. During the last few years, states to "have taken whether they want a direct-solprogram or one distributed d through brokers, which would typically have higher fees. Many states offer both varieties. Attention, Grandparents 1 '! ;; . ; It's not just parents who are opening up 529 accounts for their kids. Mr. Heywood of Vanguard says grandparents also are using 529 plans, for estate planning and to ensure that money is set aside for grandchildren in a separate account available for college expenses. He says about a quarter to ;a third of the assets are funded by grandparents. heart" earlier criticism of their 529 offerings, says Kerry O'Boyle, an analyst Almost every state offers a 529 plan and some offer more than Some older people are making very large 529 contributions for their grandkids. Under tax rules, you can give up to $12,000 this year to another individual without any federal tax consequences. A couple can together give $24,000 to one for Chicago one. recipient. clude Virginia and Arizona. Picking a Plan invest ' " " : By Update: Soccer, a Shower and a Dog Time out. This week, I'll revisit previous columns on a bathroom-remodelin- g project; an injury I sustained playing soccer; and how much I was willing to spend on my dog's medical care. Earlier this year, my wife, Amy, and I decided to remodel our master bathroom. The tub had broken in 2004, and wasn't reparable. But instead of replacing the tub, we replaced the entire bathroom, which we never liked to begin with. Out went the stark look with lots of brass and white faux marble; in came the warm Asian theme with lots of slate and bamboo and mood lighting. It's a style, I originally wrote, not very common in my home state of Louisiana, and I wondered whether personal tastes should be tempered in a remodeling since it might affect resale at some point. I won't know the answer to that question for a long time, since our house isn't up for sale. However, another question has emerged: all those jets in the shower? And I would have gone with a simpler faucet system. There are ways to cut costs, but we made the decision to spend on what we did." By "we" she means me. I took control of this project, and Amy said little because I was so forceful in my vision. "I just went along with it," she says. "If I had to do it all over again, though, I would not spend this much money." & Money is now in video podcast format. Get information on how to subscribe at WSJ.comtofeandmoney, where Mrs week you can aso itetcfi Jeff and Amy Opdyke talk about why they spent so much money remodeling theirbathroom-andwhethertt- iey now think it was worth it You can also view an Jeff's decision, over Amy's objections, to continue playing soccer. earlier video on . Neither would I, actually. So I see this experience as a lesson learned: When it comes to remodel-ing-an- d our kitchen is next-ne- ver equate your spouse's silence with acceptance. Your passion about a project may overwhelm your partner into submission. Was the cost worth the end result? let me say that we love our new bath. It turned out even better than I envisioned when I deNow, signed it. I love my new shower with the trio of body jets. When the glassworker came to install the shower doors, he walked into the bathroom and within seconds said, "This might be the coolest bath I've ever been in." But...we overspent our budget by about 75. A large part of that came in the fine print of our contract; the two sentences noting that "all material necessary for electrical, plumbing, tile and flooring" were excluded from the quote, and that the "total price may change due to the time and labor required for specific material." I read that originally and had no worries. I was buying all the material myself. However, I wasn't thinking about supplies needed for the internal plumbing, or for laying a ton of slate. And I didn't recognize the effort involved in laying so much tile in certain patterns, or the plumbing required for body jets and faucets. I was stunned by the final cost. Amy thought that while the "end result is gorgeous, the cost was too high. Did we really ned she was with me. As she told me, "It's not what division you play in, it's how you play the game. You Love & Money: A Video Love $120,000 College Kitty Keeps Growing Assets in 529 college savings plans ($billions) per beneficiary, from a married couple-with- 120 too 90.7 80 60 five-yea- It mi,: out generating a taxable gift, assuming that no other gift is made to the same person during r the period. Don't Put 139.9 $140 Off 52.3 35.lfi 40 ." 20 Saving for college, even if you start early, is 1.0 2.0 3.0 98 .W '00 "Someintimidating. times families decide 'estimated there's no way I'll meet that goal so I won't try," says Ms. Williams of the College Savings Plans Network. Instead, she says, "we're trying to get people to invest and save in a systematic fashion." There are a number of online 9.2 "01 1)2 "03 '04 tS '06 '07 '08 Source: Financial Research Corp. sites to help consumers compare - " 529 plans. Two of the most popular ones are Savlngforcollege.com and www. CollegeSavings.org, which is coordinated by the College Savings Plans Network. Before Teething, Start Saving goes a long A when cash savers have time little wasn't spared the market's wild gyrations last month. But "the returns have been reinvestors warding' for long-terwho understood the risks, says way and on a hospitable stock market their side. In fact, just $3,000 Invested 18 years ago would be worth enough today to pay for a semester's tuition at a private school like Princeton University or a year's tuition, board and books at a public institution like the University of Virginia. The numbers work because the stock market mostly goes up over time allowing a small investment to grow to impressive Fran Kinniry, proportions. Consider this: The Vanguard 500 Index Fund (VFINX), which tracks the Standard & Poor's 500-stocindex, has grown 50456 over the past 18 years, or an average 10.5 annually, according to Chicago researcher Morningstar. So $3,000 invested on Aug. 31, 1989 (equivalent to an investment of $5,039 in today's dollars) would have been worth $18,127 at the end of last month. This assumes that all fund distributions were reinvested in additional shares and no . , money was withdrawn to pay tax along the way. To be sure, it wasn't a smooth ride. Stock prices plunged during the bear market of 2000-200- 2 and, more recently, the fund a principal in Van- guard Group's investment counseling and research department.' The most painless way to save for college is to start as early as possible," he adds. Of course, many families don't put all their college savings in stocks. Particularly as a child approaches the age at which withdrawals will begin, it makes sense to add in bonds and cash-lik- e holdings that are less volatile but also typically deliver lower re-- ' turns. That's also the design of the portfolios offered ; in many 529 plans. And remember that the power , of compound interest cuts both ' ways not just helping grow a nest egg but also magnifying the , cost of repaying a college loan after graduation. The University of Virginia estimates tuition, board amount to about and books-wi- ll $17,225 for Virginian undergraduates this year. A combination of Stafford and PLUS loans for that . amount, with a ICtyear repayment period and today's standard rates, would eventually cost $24,367 in pnncipal and interest payments. ; By Jaclyne Badal Changes Loom Over Other Programs By Jeff D. Opdyke again to update readers how various issues have But under the rules for 529 plans, you can give up to five years' conto tributions at once-- up $60,000 per beneficiary or In early July, I was injured in a soccer game and nearly had to have emergency surgery on my leg. Fortunately, I ended up in an immobilizing leg brace for a while, and then had to endure a month of only know how to play one way, and that's all out. I don't want you coming to me and complaining the next time you get hurt." As I said, she isn't happy. At the risk of sounding callous, it isn't her happiness that's in question. It's mine. As I noted in the original column, soccer has been my passion since about sixth grade. I'm as eager today to get out on the field every week as I was as a kid. I see no reason to walk away from the only athletic activity I pursue while I am still physically capable of playing. My doctor said the exercise and enjoyment I get is a clear benefit to my health despite the occasional dings. Amy and I didn't necessarily discuss my return, as we would typically do with other issues. I knew her stance; she knew mine. And there was no common ground. Either I quit or I didn't. I didn't. . Finally, a note about my Siberian husky, Misha. She has died. Several years ago, I asked in a column if, because of rising medical costs, there comes a point at which a family pet is just another animal-a- nd you stop writing checks. At that time, Misha, then 10 years old, was having health issues related to a couple of tumors. Over the ensuing years, Amy and I shelled out thousands of dollars to have tumors removed in Misha's eye, leg and abdomen. That's money that we could have applied to college costs or retirement savings or any of a number physical therapy. As I wrote in a column, Amy wanted me to hang up my goalie gloves for good because of her concerns that since I play with the abandon of a a future injury-particula blow to my head or hands-co- uld damage my career as a writer and my ability a of .other financial priorities. to support my family.? . , , .; : r But, at the end of the' day,1 I asked in that column what say Misha was my buddy, and I never spouses have over hobbies that pogave a second thought to costs of her care. When she fell ill again, tentially affect the family's livelihood. . our yet told us it was OK not to For readers Who saw the pursue further treatment. Misha weekly Love & Money video that fwas approaching 14 at that point. So, one painful night for her, Amy and I posted online a few' weeks ago (viewable at WSJ. she collapsed, unable to move. I comloveandmoney), you'll allay next to her and tried to comfort her while she howled and whined. ready know how I answered that We fell asleep together, and I question: I am returning to the soccer field. I've stepped down in awoke early in the morning to find class, skipping Division 1 in my that she had died lying on my arm. over-3men's league, for a spot on Her ashes sit in a wooden box a new team in Division 3. on my desk. That concession, however, means nothing to Amy-- as was Jeff Opdyke covers personal finance also clear to anybody who watched for The Wall Street Journal. Write the video, and saw how annoyed him at lovemomyenj.com Arden Dale J beyond 529 for a child's may need a refresher course to get up to speed on changing tax rules, fi - Recent tax-lachanges dented the appeal of saving through custodial accounts, those established under a state's Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA). If looking save Parents tocosts ments are met' Some families put money into ESAs as well as into 529s. One advantage compared with 529s: Money in an ESA can currently be to pay for priwithdrawn tax-fre- e vate 2 education, as well as for college expenses, while 529s are only for college costs. And "for some people," Mr. Hur- you set up an account years ago for a child who's now 18 or older, there may be reason to take some action before year end. Meanwhile, looming changes mean that Coverdell Education Savings Accounts could lose many of their benefits after 2010. Here's what you need to know: Custodial Accounts With an UTMA or UGMA account, an adult serves as a custodian for money that is technically owned by the child, until he or she is an adult. The child owes tax each year on investment income. The benefits of these accounts have been narrowed by changes to the "kiddie tax," a set of rules that taxes a child's investment income over a certain threshold $1,700 in 2007 at the parents' rate. Congress widened the reach of the tax starting in 2008 to include all children younger than 18, dependent children who turn 18, and dee students ages 19 pendent through 23. For years, only children under 14 were subject to it, before the ceiling went to 18 in 2006. The kiddie-ta- x changes mean that more UGMA and UTMA owners next year will face taxes as high as 35 on some types of investment income, rather than the 10 or less they might have paid based on the child's tax bracket. One piece of advice from several college-saving- s experts: If you set up an UGMA or UTMA years ago for an affected child who is over 17 but under 23 this year, consider acting before year end to sell securities that have gone up substantially in value. That way, the capital gains will be taxable at the child's rate rather than the parents' rate, which could be as high as 15 on long-tercapital gains and 35 on short-tergains. "There's a window because the new kiddie tax starts in 2008," says Joe Hurley, founder of an independent Web site about 529s and other options. "If they need to liquidate their investments to pay for college, they might want to think about doing it this year when colleg- e-saving upfront tax deduction. But money inside grows free of federal income tax, and withdrawals are also tax-fre- e if certain require- , HrVlMMMrWlr"VVllil they can still get it in their child's low bracket." Stuart Ritter, a financial planner with investment firm T. Rowe Price Group, notes that "UGMAs got popular before there were 529s or Coverdells," and the custodial accounts have limited appeal for people setting up college funds today. The latest kiddie-tachanges aren't the only negative. Another drawback: assets held in a child's name can reduce the amount of financial aid for which a family qualifies. (529 accounts are often owned by a parent or grandparent, x which is more favorable for aid ca- lculationsand they aren't considered an asset for aid purposes even if owned by a child.) Coverdell Accounts With Coverdell Education Savings Accounts, sometimes called ESAs, most families currently qualify to make annual contributions of up to $2,000 a child. There's no Time to Pick a ley says, "another advantage over 529s is that you have more investment options with these accounts." However, several ESA benefits will expire after 2010 unless Congress acts: 2 expenses will no longer qualify. The annual contribution limit will be cut to $500. And withdrawals won't be tax-fre- e in any year in which certain education tax credits are claimed for the beneficiary. , One reason not to be too worried, though, about the future tax treatment: An ESA can be transferred tax-fre- e at any time to a 529 with the same beneficiary. Note that there are income limits on ESA contributions: The ability to contribute is phased out between $95,000 and $110,000 of modified adjusted gross income on an individual tax return and between $190,000 and $220,000 for married couples filing jointly. With Coverdells, families have to take care not to exceed the $2,000 contribution cap. If a parent puts $1,000 in a Coverdell for a child and a grandparent contributes $1,500 to a separate Coverdell for the same child, $500 of the $2,500 will be subject to excise tax. Stock-Mark- et the sharp volatility in market of late, it's as easy to pick a winner, but it certainly is an opportunity for our stock pickers to show their mettle. With We're getting ready for a new In vestment Dartboard game, so it's time to narrow down those stock picks. In Contest No. 29, as in the past, six readers' picks will vie with a . ? portfolio picked by Sunday Journal staffers tossing darts at the stock listings from the newspaper. The last day to enter will be Sunday, Sept. 23. The winner among the six readers for the six months through Winner March 2008 will get lifetime bragging rights and a Sunday Journal tote bag. Reader and dart choices will be announced Sunday, Oct. 7. The Rules: -- Send us your stock pick via email to our contest address sundaydartboardwsj.com. No entries by regular mail. -- You must include your name, address, daytime phone number, email address and the name of the local newspaper where you read Sunday Journal. -- Brokers and other financial professionals can't compete. Neither can people previously chosen as contestants. -- You must be willing to be in terviewed. t |