By Patrick Duffy
We have two kids and we would like to start putting some money aside for their college education. Have you any suggestions?
— C.R. Westchester
The question put to me during the week by a client is a question many people ask themselves today. Sending kids to college is a major expense and some foresight certainly helps ease matters.
An Education IRA was the first answer to come into my mind. I mentioned it. I then suggested that a Roth IRA can be used for education purposes. Both of these IRAs have tax advantages. But the woman was not too happy, feeling the amounts that can be invested in either were too limiting. She wanted to invest more.
Knowing it probably would be rejected, I suggested a regular mutual fund account. And rejected it was, because of the tax implications.
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Then I asked the woman if she had ever heard of the new New York State Savings Program, which was designed to help people save money for future education purposes. She said that, no, she hadn’t. "Tell me more," she said.
"Well," I said "it’s very new, only introduced last summer ,but it might be the answer to your problem."
"How much can we invest?" was the next question.
When I answered $10,000 per couple, her voice rose and fell as she blurted out, "Oh, we don’t have that much, but it’s better than the others."
She was eager to learn more about this program and her next question was a good one: "If it’s a New York State program, does that mean that the kid must go to school in New York?"
She was delighted when I answered that the money can be used to send the kid to any accredited school in the U.S.
This woman is a savvy client, so her next question was the one I was waiting for. "Any tax benefits?" she asked.
When I answered that an investor gets present and future tax benefits from the investment, she asked me to explain a bit further.
"Well, the year in which you make the investment you can claim a deduction for it on your New York State tax return," I said. "This will save you in state and city taxes. That’s the present tax benefit."
She was not letting me off, so she followed up with, "And what about the future tax benefits?"
She was pleased to learn that the investment earnings going forward are not taxed at the federal level.
But there was a slight pause in the conversation when I indicated that when the money is eventually taken out, tax will be paid at the federal level. However, her voice perked up a bit when I said that even at that time, no state tax would be due.
"This is sounding like what we are looking for" she said, adding, "Are there any snags?" Savvy woman, savvy question.
"Well, kind of," I said as I explained that the money must be invested for a minimum of three years and if the account is not used for educational purposes, it is fully taxed when withdrawn and there is an additional 10 percent penalty.
Not letting up, she asked, "And how do I invest the money?"
"It’s very easy," I replied as I told her you simply hand over the money to TIAA-CREFF. How it is invested depends on the age of the child. The younger the child, the more stocks are used. The closer the child is to 18 years old, the less there is invested in stocks and the more that is invested in bonds and cash. Prudent investing. "In other words," I said, "neither you nor the child has any control over the investment.
Another day, another phone call, another step on the road to financial success for a family, another happy client.
Patrick J. Duffy, M.S., CFP, is a certified financial planner practicing in New York City. He specializes in business and personal financial planning with the overall aim of enhancing an individual or family’s quality of life. His office is at 767 Lexington Ave., New York, N.Y. 10021. He may be reached at (212) 755-7736.
If you have a question related to business of personal finance, mail or fax it to The Business Section, Irish Echo, 309 Fifth Ave., New York, N.Y. 10016; (212) 686-1756.