April 21, 2008 11:59AM

Saving for Children’s Education

By FOX Business

Question:

I currently have three young children under the age of five. I save about $150 a month, which I put into a 529 plan. I know this is not going to by any means pay for their college educations, but am I going to be penalized (i.e. less grant and loan money) when it comes to finance their educations because I have saved?

Answer:

The simple answer is “yes,” but that shouldn’t put you off these plans. Perhaps the biggest drawback of 529 plans is that they’re often used against you in the college-finance decisions. Here’s out it works: Under the federal methodology for financial aid, a 529 plan - named for the part of the tax code that allowed these college-savings plans - is treated as an asset of the person who contributed to it - namely you. That means they can count 5.6% of the account balance as assets for financial aid purposes.

Private colleges may have different rules, but under what’s known as an institutional method, colleges may add as much as 5% of the assets in a 529 plan.

Obviously, then, the decision to continue with a 529 depends on what you expect your own assets to be at the time the kids go to college. But most other alternatives to college savings also carry a “penalty” when it comes to financial aid.

One last point: If you come to believe that any of your children might not go to college, a 529 isn’t the right place to save money. Currently, 529 plans can only be used for college (though you can reassign the plan to another beneficiary to other family members, though regular gift-tax rules apply).

April 4, 2008 7:05PM

Pension, IRA, and 401K

By FOX Business

Question: My company offers a pension plan, but I’m not confident it will be there when I retire. Is there a safety net I can create on my own?
Answer: You’re right to be worried. More and more companies are getting rid of defined-benefit plans like pensions, opting instead for defined-contribution plans like 401(k)s. That means that there’s a very good chance you won’t be drawing down from a pension once you retire.

Many retirement planners and financial advisors suggest a Roth IRA if you want to start putting something extra aside, particularly if you’re an older worker.

“I think the Roth IRA is not recognized enough” Nancy Langdon Jones, a certified financial planner in California, told FOXBusiness.com. “It’s just such a great retirement vehicle.”

Why? The tax structure. When you contribute to a regular IRA account, you can be taxed on your initial contribution and whatever profits are generated over time.

With a Roth IRA, if the account has been open five years and you are older than 60, you can’t be taxed on any earnings from it–only on your initial contribution, which comes from your already earned, non-deductible income. And if you have done well and saved and your net-worth is high, you can leave the money to your heirs – income-tax free.