Dynamic Chiropractic – July 16, 2001, Vol. 19, Issue 15

The Cost of Education

By Stanley Greenfield, RHU
I can remember when I went to college and I thought that it was expensive! I borrowed a total of $1,500 from the government under that old NEDA (National Educational Defense Act) loan. I paid a whopping 2.5 percent on that loan, and my payments were $10.78 per month for 10 years - not a real "back-breaker!"

I got some information recently comparing the "UGMA"(Uniform Gifts to Minors Act) to the new "529" plans (from section 529 of the Internal Revenue Code).

I took the liberty of adding one more plan to this comparison for you to consider. If you have read any of my past articles, you might remember the ones about becoming a millionaire. (You can always go to ChiroWeb.com and check out my articles at www.chiroweb.com/columnist/greenfield). For what it's worth, here is what I found:

We begin by looking at the UGMAs. In some states, they are referred to as the Uniform Transfers to Minors Act (UTMAs). You can make annual gifts to an UGMA in amounts up to $10,000. Once you do, the asset must be used for the benefit of your child. One point to remember is that when the child reaches majority age, which could be 18 to 21, depending on the state you live in, the child can use that money however he or she wants. The first $750 of unearned income each year is currently tax-free, and the next $750 is taxed at the child's bracket. Any earnings over $1,500 are taxed at the parents' bracket until the child reaches age 14, at which time all earnings above $750 are taxed at the child's bracket. If the child's rate is 15 percent, then capital gains are taxed at a 10 percent rate. An UGMA account can invest in just about any mutual fund, and is not limited to any specific funds.

The new 529 plans are not limited on the contributions, and all the earnings grow tax-deferred until withdrawn for college. Starting in 2002, the distributions are tax-free. The contributor retains control over the funds, even after the child reaches majority age. If the contributor takes out any money to use for purposes other than college expenses for the child, a penalty of 10 percent is payable on the earnings. The investment options are limited to whatever the 529 plan has within its portfolio.

Now let's look at my "other plan." My plan has no limitations on the amount contributed. The earnings each year are sheltered from current taxation, as with the 529 plan. You are limited to an investment portfolio of around 25 mutual funds. When you withdraw money for the child's education, there is no tax due. In fact, if you take money for any purpose, there is no tax or penalties at any time. The child pays no tax, and you pay no tax. You maintain full control over the funds, and the child has no say-so whatsoever, at any time. That in itself makes it valuable!

I ran some numbers to see what each of these plans would do over 18 years. What would happen if you deposited $5,000 per year into each of these plans? The UGMA account would accumulate $224,500. The 529 Plan would yield $253,000. My "plan" would yield $200,000. These are all based on an after-tax basis. It appears that the 529 plan yields the most money. I did however forget to mention that my "plan" also would pay out an additional $977,954 as a retirement plan to the owner, and there would be no tax to pay on those dollars. So the total for my plan is now $1,177,954.

Starting in 2002, the Educational IRA will raise the contribution to $2,000 a year per child. The current maximum is $500. If that were contributed for 18 years at an eight-percent, you would have $80,892.

What if your child decides not to go to college? Well, both the UGMA and the 529 plans have some adverse reactions that affect you both tax-wise and financially. The educational IRA will probably have some limitations and penalties, as well. My "plan" just keeps on ticking, and pays you a totally tax-free retirement income totaling over $4,000,000.

I also ran some other interesting numbers for you to consider: I compared the amount you would have to contribute to each plan to yield $100,000 "after taxes" for college. I assumed that the child was just born, and you had 18 years to accumulate the money. Here is what I found: The UGMA would require a monthly deposit of $1,938. The 529 plan required $1,977 per month. Remember, I said $100,000 "net after taxes" for college use. My plan required $250 per month; The educational IRA has a limit of $2,000 per year. In 18 years, at an eight-percent return, it yields just $80,892. At a six-percent return, the yield is $65,520.

The cost of an education has certainly gone up since I was a college student back in the late 1950s. The old NEDA loan program is no longer available, and I am sure that even if it were, the 2.5-percent interest rate would be a few percentage points higher! You now have a comparison of three plans that are available to you to accumulate educational funds. I hope this has helped. As with all of the information presented in my articles, if you have any questions, you can contact me at www.ChiroWeb.com or at my e-mail address listed below.

Stanley Greenfield,RHU
Jacksonville Beach, FL 32250
Tel: (800) 585-1555
Fax: (904) 247-1266

Click here for previous articles by Stanley Greenfield, RHU.


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