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529s Make Great Gifts Ask The Experts The problem: I started to contribute $40,000 to the educational funds of my five great-grandchildren but was surprised by this statement in fine print on the paperwork: "Your account is not insured by New York State nor do its affiliates guarantee the principal or return on investment." Are these funds legal? The experts: Robert A. Sagar, president and founder of the Senior Financial Center®, Rockville Centre. The rules: The "educational funds" you refer to are most likely college savings accounts known as "529 plans," named after Section 529 of the Internal Revenue Service code. In 1996, that section established tax-deferred accounts designed to help people save for higher education. So, yes 529 accounts are legal. How it works: A Section 529 plan includes an investment or savings account where the money being saved for college can accumulate over the years. The investment choices range from basic savings accounts to stock mutual funds. The "fine print" stipulating that your principal is not guaranteed refers to the provision that if you choose to invest in a mutual fund, the fund company will not guarantee your principal. If you select a fixed account that guarantees a particular interest rate, your principal would then be protected. What investment vehicle you select should be based on the ages of your great grandchildren and how many years they have until they enter college. Do not base your selection on your own risk tolerance: you are in the preservation phase of your financial life, but these funds are for your great grandchildren, who are in the accumulation phase. Also, keep in mind that money invested in the market, if given enough time to grow, has a greater potential to appreciate while minimizing risk. The results: Your contributions to 529 savings plans will be considered gifts for federal tax purposes, and the growth of the accounts will be tax-deferred. Qualified withdrawals are tax-free if used for educational expenses, though state income taxes may apply. Overall, a 529 plan, set up correctly, can be a wonderful gift to your great grandchildren. Article by Karen E. Klein. |
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