I was feeling pretty good—in control, capable. Smug.
I risked not a penny in the stock market in 2008 except for a few Indiana stocks owned by my retirement plan, and I had luck with those. The National Bank of Indianapolis, whose board I chair, reported substantial earnings, strong capital and no losses in subprime loans. Moreover, I managed to completely escape the clutches of Bernie Madoff. I figured the economic misery swirling around us had not sucked me under. But then …
… I read the year-end statements from the 529 College Saving Plans I had established for the benefit of my grandchildren, and I felt lower than a snake’s belly.
Hatched by Congress in 1998, Section 529 of the Internal Revenue Code encourages taxpayers to save money toward the cost of college education for their loved ones. The catch: You have to entrust that money to third parties.
Each state has adopted its own plan within the guidelines set forth by the IRS. Indiana amended its law as of Jan. 1, 2007, to offer an additional incentive in the form of a tax credit for 529 Plan contributions. Limited to $1,000 for couples filing jointly, it is, nonetheless, an attractive advantage. Under the Indiana plan, the student may attend any public or private two-year or four-year qualified college nationwide. The account can also be used for graduate school, including medical school and law school.
529s offer a host of incentives. Although contributions are not deductible, no taxes are assessed on the earnings. (I’ll get back to that later.) Distributions to pay for college costs aren’t taxed by the federal government. Access and control of the account are maintained by the donor, who may roll over the account from student to student. Anybody can play. There are no income limitations for contributors and the amount of plan contributions is substantial. In Indiana, you can contribute up to a maximum account balance of $298,770 for each beneficiary.
I created seven of these plans, one for each grandchild, thus I was accosted by seven reports of colossal devastation on the part of the mutual fund companies chosen by the state of Indiana to invest these assets. Over one-third of my largesse had vanished in less than a year.
An array of choices was offered, from aggressive growth to conservative income portfolios. I opted for the age-based option, which balances the risk with the date when funds will be withdrawn for education. (This has been an expensive education for me as well.) I suppose I could have opted for a safer employment of capital within the funds, but I declined to carefully read the promotional materials and the more than 50-page disclosure statement. That document not only outlined investment alternatives, but also made it clear that if the fund management was botched it would not accept any liability nor would management fees be altered.
You may wish to investigate alternatives to the 529 program, including opportunities provided by the Coverdell Education Saving Account and the Uniform Gift to Minors Act/Uniform Transfer to Minors Act, but they don’t have the sweet tax incentives. So what? The funds probably did the best they could, but today it seems obvious: Tax incentives be damned, I should have just dropped the money in the kids’ piggy banks.
In 2008, Indiana fired its 529 manager and hired Upromise, which replaced the array of mutual fund options with a new set. What I would have preferred is a self-directed 529 Plan similar to regulations promulgated for individual retirement accounts, but that’s not permissible. We are allowed responsibility for our own IRAs, but we are not deemed capable to manage our grandchildren’s college education investments.
Oh, well, college is a long way off (the oldest grandchild is 7). If the investments don’t recover, the kids can work their way through school and tell their own children, "Papa blew it back in 2008."
Maurer is a shareholder in IBJ Media Corp., which owns Indianapolis Business Journal. His column appears every other week. To comment on this column, send e-mail to firstname.lastname@example.org.