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529 Plans remain solid vehicle

March 16, 2009

The commentary by Mickey Maurer in the Feb. 9 issue discussed the features of the 529 Plan as a vehicle for saving college funds. In the article, Maurer expressed his disappointment in the investment performance of the accounts established for his grandchildren. A quick read of the article may have the “unintended consequence” of leading readers to believe that the 529 Plan is a bad way to save for college.

The 529 Plan is the best program to date designed by the government to assist - ents and grandparents in saving for college expenses. As the article points out, the contributions are not deductible, but if used for qualifying education expenses, the earnings are never taxed.

Maurer indicates that his oldest grandchild is 7. This would suggest that it will be 10 or 11 years until the funds are needed for college. Based on historical data regarding stock market returns, there is a very high probability that these accounts will recover from their current market loss by that time.

One of the best features of the 529 Plan is the ability of the owner to take back any funds in the account not needed to pay education expenses for the beneficiary. This flexibility means the excess funds can be used for the owner’s own retirement or other expenditures. However, if the funds are not used for education expenses, income tax and a 10-percent penalty are due on the remaining earnings in the plan (deposits are never taxed or penalized).

Maurer also suggests that the Coverdell Education Savings account is a better way to save for college than the 529 Plan. The Coverdell has tax-free earnings if used for education expenses, but only allows a maximum contribution of $2,000 per year, which would probably not allow for the accumulation of more than one year of college if the fund was started when the child is born. In addition, the Coverdell plan does not provide the Indiana tax credit. The Uniform Transfer to Minors Act has no income-tax benefits and the child gets control of the account at age 21. However, both the Coverdell plan and the UTMA allow the owner to invest the funds in any investment vehicles.

All investors need to understand that it is only appropriate to invest in the stock market if the funds have an investment time horizon of at least five years.

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Elaine E. Bedel
President, Bedel Financial Consulting Inc.


Save now for children's future

Last year witnessed the worst equitymarket turbulence in recent history. In the past 213 years, only four have resulted in worse performance than 2008. Very few investors came through unscathed, and as a result many are struck with emotions ranging from nervousness to fear and saving levels are starting to soar.

Where is the best place to invest? Like virtually every single investor, Indiana’s CollegeChoice 529 Savings Plans were impacted in the past year, but investing always requires a long-term vision.

It is difficult to be patient, but that is exactly what the current environment requires. Knee-jerk reactions that make major changes in investment portfolios will lock in losses. Time after time, “chasing the market” has proven to be a costly investing strategy, so don’t do it.

Indiana’s CollegeChoice 529 Plans offer a number of best-in-class investment options that allow the choice of a strategy based on your risk tolerance and the age of the plan beneficiary. Recent plan revisions dramatically reduced the cost of investing, while broadening investing options.

Though some 529 Plans have been criticized for being too limited in investment choices, these plans were created for those who are not normally buying mutual funds or stocks. Properly crafted and marketed plans like Indiana’s College-Choice Plan will serve middle- and even lower-income families with a simple but efficient way to save.

In addition to the numerous federal tax benefits provided by 529 Plans, Hoosiers can take advantage of the best college-savings tax credit in the nation. So, while your contributions and earnings are growing tax free in your 529 account, you can receive a tax credit of 20 percent, up to $1,000 against your Indiana income taxes. This past year, thousands of CollegeChoice investors saw the 20-percent return in the tax credit mitigate the pain of what happened in the broader markets. Even better, some Hoosiers actually received “free money” as a result of the partnership of CollegeChoice with Upromise Rewards, as $215,000 was earned by members who were investing even as they purchased everyday items such as groceries, gas and clothing.

There has never been a more important time to save. Hoosier common sense continues to be demonstrated even in this financial crisis, as the number of CollegeChoice Plan accounts have increased 25 percent in the last five months. So if you’re not already saving for your children or grandchildren, join those who are demonstrating their faith in the future by so now!

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Richard Mourdock
Indiana State Treasurer,
Chairman, Indiana Education Savings Authority

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