newjerseynewsroom.com

BY WARREN BOROSON

NEWJERSEYNEWSROOM.COM

BOROSON ON MONEY

Contributions to the state’s 529 College Savings plans may soon be tax deductible. The Assembly and Senate are expected to approve legislation, and placed on Gov. Christie’s desk, later this year. The bill would make the payments partly deductible – despite the current financial austerity program in New Jersey.

Right now the state is among only seven that have state income taxes and yet don’t make contributions to the 529 plans tax-deductible.

The new deduction would be a maximum of $5,000 per beneficiary, and $10,000 if husband and wife make the contribution.

All 529 plans offer a wonderful blessing: The appreciation in the savings escapes taxes when withdrawn to pay qualified higher-educational expenses.

Obviously, much of the criticism of New Jersey’s 529 plans – once contributions become partly deductible – should promptly cease and desist. (One New Jersey newspaper actually wrote, last year, that our 529 plan “stinks.”)

Typically, evaluations of various 529 plans – every state has at least one – dismiss New Jersey’s because contributions here aren’t deductible. “Why stick with New Jersey?” the evaluators sneer. (Anyone can invest in another state’s plan.)

The state’s 529 plans were recently rated “average” by Morningstar, the financial publisher. But that rating gave a black mark to 529 plans where contributions were not tax-deductible.

Besides which, Roger Michaud – a senior vice president at Franklin Templeton Distributors, program manager for the New Jersey plans – reports that Morningstar may change its ratings of some investment options after revaluating its analysis. The two state plans are NJBEST and the Franklin Templeton 529 College Savings Plan.

In general, Franklin Templeton funds have decent long-term records and Mutual Series funds have splendid long-term records. They are the leading mutual funds in New Jersey. Even though Franklin’s headquarters are in California, it has investment teams in New Jersey – in Short Hills and Fort Lee.

New Jersey’s plans have a special benefit: They provide scholarships to students who decide to attend New Jersey colleges. The scholarships are awarded to everyone who qualifies, regardless of need or grades. The longer the student has been the beneficiary of a 529 plan, the higher the scholarship – with a maximum of $1,500. New Jersey, of course, has a goodly number of fine schools, including Princeton, Drew, Rutgers, Fairleigh Dickinson, and Ramapo.

Another criticism of New Jersey’s plans is that they are expensive. But the critics agree that the expenses have been coming down. The NJBEST program management fee was reduced by 50 percent (to 20 basis points, 0.20 percent), and expenses for the S&P 500 529 Portfolio declined, after one manager was replaced by another.

New Jersey’s plans have a special benefit: They provide scholarships to students who will attend New Jersey colleges. The scholarships are awarded to everyone who qualifies, regardless of need or grades. The longer the student has been the beneficiary of a 529 plan, the higher the scholarship – with a maximum of $1,500. New Jersey, of course, has a goodly number of fine schools, including Princeton, Drew, Rutgers, Fairleigh Dickinson, and Ramapo.

Why should New Jersey care so much about its 529 plans? Well, we want New Jersey to be a desirable state for people to live in and to continue to live in. We want parents to save money for their kids’ college educations, and not to pay the bills at the last moment -- far more costly; we want kids’ to obtain good educations -- and not enter the workforce burdened with debt. (I’ve met young people starting their careers with crushing college debts of $100,000); and we would prefer these kids to attend schools in our fair state -- to maintain the excellence of those schools by sending our top students there, and to assure the prosperity of our state’s economy by having them spend money here.

Besides, it’s sensible for parents to pay for their kids’ college educations via 529 plans. The cost is far, far less if they start saving early, and in a vehicle where any growth in value may be immune from taxation.

In short, New Jersey’s 529 plans are becoming far more competitive. Making plan contributions partially deductible is a home run.

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I have one criticism of the plans: There are a ton of decisions for parents or grandparents to make. Maybe this is unavoidable, but even if you choose the simpler NJBEST plan, where you do things yourself, you can choose an age-based allocation – conservative, moderate, or growth – depending on how exposed to stocks a child’s portfolio is as he or she approaches college age. Or choose between six other portfolios that don’t change over time, such as the S&P 500 Index 529 Portfolio (all stocks), the Income 529 Portfolio or the Stable Value 529 Portfolio (all fixed income). You could, of course, choose a mix of age-based and objective-based portfolios. Complicated.

The other main choice, Franklin Templeton 529 College Savings Plan, is offered through financial advisers in your area. These are not fee-only financial planners, of course, because they receive commissions; on the other hand, fee-only planners can put their clients into the NJBEST program. Of course, financial planners can be a big help to their clients, who are all too likely to stop investing during a market meltdown and pour in money during a possibly temporary bull market. Or who wouldn’t lower their kids’ exposure to stocks as they approached age 18. I’ve spoken with parents devastated because they lost much of their kids’ 529 savings just at the wrong time – because they didn’t move from stocks to bonds at the right time.

In the Franklin Templeton plan, you also have a choice of three age-based asset allocations, along with 12 other portfolios including: Franklin Flex Cap Growth 529 Portfolio, Franklin Growth 529 Portfolio, Templeton Growth 529 Portfolio, and Mutual Shares 529 Portfolio.

My own generic recommendation: a conservative or moderate age-based allocation in the NJBEST plan. So, at the age of 17 plus, the kid’s portfolio is 100 percent cash or 80 percent income and 20 percent cash.

Some important points:

• Despite Paul Krugman’s recent column arguing that college educations won’t be worth as much in the future, a study found that in 2008 high school graduates made $33,618 a year, college graduates $60,954.
• The top amount of contributions for one beneficiary is limited to $305,000.
• You can open an NJBEST account with an initial investment of only $25.
• Plan assets of up to $250,000 will be ignored when the state determines a student’s eligibility to receive financial aid.
• Plan assets by and large are excluded from creditors’ claims and excluded from an estate in bankruptcy. (This is only New Jersey law.)
• Begin investing $463 a month now and get (possibly) 8 percent annually before taxes? Or wait until your kid is 15 and then borrow the money, paying interest at (possibly) 5.6 percent for at least 15 years? If your child is newborn and has 18 years to go before college, the cost could be almost $224,000. The difference, in this case, between investing now and 18 years from now: $229,937.
• The first $25,000 in savings will be ignored when the state considers financial aid.

Warren Boroson will answer financial questions sent to This e-mail address is being protected from spambots. You need JavaScript enabled to view it .