Never too early to start saving for college days
Your Turn
Guest Column • Joseph Mercurio
Family members can be taxing, no pun intended, and having them fire you is embarrassing. Such was the case when I suggested a 529 college savings plan to my daughter who had recently graduated with over $20,000 in loans.

As her dad, I explained that she could not fire me because she lived with me, relatively inexpensively, and that I had promised to help her with the other half of those loans. As her financial adviser I outlined my plan so that she would not face the same obstacles in saving for her children's college education.

Saving for college is a daunting task at any age, but waiting until the baby is nursing is too late. Income is always limited with diapers and formula consuming the majority of the budget. Quickly, the years of diapers turn into toys and then into proms and with a nod of the head and a blink of an eye, it is not Santa coming down the chimney but dreams going up in smoke.

Complex bicycle instructions turn into baffling financial aid forms and instead of withdrawing funds from a savings fund, a financial aid officer is pulling data far more painfully than a root canal.

529 college savings plans are investments that accumulate tax-free, and any withdrawals made for qualified higher education are free from federal income tax.

To illustrate how important that is, if you invested $36,000 today in two separate accounts, one taxable, the other tax deferred, and assuming the same rate of interest, you would have over $45,000 more in the tax-deferred account over 18 years.

What if you don't have $36,000 to invest? Let's look at the following scenario: Eighteen years from now it could cost $154,000 to send your child to college. You could wait until they begin college and borrow the money at 6.8 percent taking 15 years to pay off the loan. That scenario will cost you $247,000 by the time you pay off the loan.

On the other hand, if you invest $322 per month in a 529 plan and earn 8 percent on your investment, it will only cost you $70,000. That is a savings of over $177,000.

Grandparents, relatives and friends who normally give those wonderful EEE savings bonds that somehow get lost at just the time you need them can contribute to the 529 account. If you have some wealthy relatives lurking in the gene pool, they can donate up to $12,000 each into the plan for up to five years and $24,000 for couples.

The money can be used at any accredited college. These plans are not just for your children. One of the questions my daughter asked me was, "What if I don't have any children?"

Quickly switching from financial adviser to dad, I told her that I would disown her. Reversing roles, I explained that she could use the funds to go back to school if at some point she wanted to pursue an advanced degree or change careers. I explained how a woman at the age of 49 decided that she wanted to learn howto cook, so she enrolled in a class in Tuscany, Italy. Since 529 funds can be used for tuition, room and board and the school did not have on-campus housing, she and her husband rented a villa using those funds for the two years of schooling.

In addition, if she did have children and they decided not to go to college, the beneficiary can always be changed. So at 18 if your son decides that traveling cross country on his Harley-Davidson is more enticing than becoming a doctor or lawyer that you always envisioned as he slept in his crib, then you can simply switch the funds over to the middle child who has probably felt left out all those years anyway.

But if building motorcycles is their dream, the funds can be used at technical schools, too. If no one in the immediate family uses the money, it could be transferred to grandchildren, siblings, spouses and relatives, including those dreaded in-laws.

If for some reason the money was not used for qualified higher education expenses, then she would pay federal and state income taxes on the earnings plus a 10 percent penalty. It is important to note that the tax and penalty are on the earnings, not the full amount of the plan. So in a worstcase scenario, if she accumulated $50,000 in the account and $20,000 was interest, and she was in the 25 percent tax bracket, the taxes and penalties would be $7,000 if she took the entire amount in one year.

That is still a nice savings account for emergencies or to supplement retirement income. In fact, one of the questions she asked was if she could use the money to pay off her existing loans. Technically the answer is no, but if years later she was struggling to pay off that debt, she could access the fund, pay the penalty and tax and be debt-free.

One important aspect of funding a 529 plan is starting early. Trying to find money to save or invest is difficult, but money saved is never missed.

Hopefully, as my daughter gets familiar with investing, she will increase her savings and take advantage of not only a 529 plan, but also her 401(k) or IRA or any other taxdeferred account that is available. In fact, if she elects to save $500 monthly, putting $400 a month toward a 529 plan and $100 per month toward an IRA, she will have accumulated $140,000 toward college in 15 years.

At that point if she dedicates the entire $500 toward retirement, she will have over $300,000 in her IRA after 30 years. Of course this assumes a certain rate of return, but the most important aspect is the compounding of the interest tax-free all those years.

So, my relationship with my daughter and client are back on solid ground. She has established a long-term savings plan and I can look forward to my grandchildren being able to afford a college education. Now if only they had created a 529 wedding savings plan!

Joseph Mercurio is a resident of Freehold Township.