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TAKING STOCK
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This column takes a
departure. In the interest of higher learning,
this is not about individual stocks, but about
investment vehicles that will further the
education of future generations of Virginians. Sounds high and mighty, but the fact is that otherwise smart investors can do dumb things when it comes to saving for school. "One of the problems people have is they wait too late to get started," says Melissa Walden, an assistant vice president with Richmond's Davenport & Co. "Then sometimes they don't have a realistic view of how much money they'll need." |
| Maybe Junior is comfortable in combat boots or can regularly hit three-pointers under pressure from players twice his size. Otherwise, parents -- or even grandparents -- who plan to foot the bill need to keep in mind that inflation is higher for education expenses than it is for the economy as a whole, Walden says. |
There are more strategies for education investing than can be touched on here, but a few new tools may prove useful. One is the Education IRA, part of the Taxpayer Relief Act of 1997. Despite the name, it has nothing to do with retirement. It's a tax-advantaged account in which you can deposit $500 per year for anyone under age 18. The earnings are withdrawn tax-free if used to pay for higher education. And if Junior does end up with a full scholarship, it can be rolled over to another child in the same family.
Single taxpayers earning less than $95,000, or couples making less than $150,000, can make the maximum contribution. It's reduced at higher earnings levels. The student has until age 30 to use the money. Even funded to the hilt, an education IRA isn't going to put Junior through Harvard. But at a 10 percent annual rate of return, that $500 per year could be worth more than $25,000 over 18 years, Walden notes. And some firms, such as Davenport & Co., don't charge setup or maintenance fees for Education IRAs.
Another route for those who have the advantage of long-term investing is to fully fund a Roth IRA. Federal rules allow withdrawing from an IRA to pay for education expenses. It's a good way of accumulating funds. "An advantage is that you can pull out your contributions. ... You don't get penalized, and you can leave the earnings in there to keep growing," Walden says. Tack that to the Education IRA, and the numbers start to add up.
In addition to IRAs, there's a Virginia-specific vehicle worth a look. It has more restrictions, but anyone who might have children or grandchildren bound for in-state schools should consider the Virginia Prepaid Education Program. The program, created by the General Assembly in 1994, locks in current undergraduate tuition and fees at today's costs. Unlike IRAs, there are no income limits.
Here's how the program works: Prices are fixed for a given year, and enrollment runs for three months starting in October. The parent of a newborn Hokie hopeful, for instance, could have signed a contract and plunked down $15,924 by Feb. 1. That would have covered four years of tuition at any public college or university in the commonwealth for enrollment in 2017. Alternatively, the parent could have paid $320 per month for five years, or $136 per month for about 18 years. Purchasers don't need to buy all four years; any combination is fine.
Program participants are betting, not only that the child will be admitted to and enroll in a Virginia school and qualify for in-state rates, but that tuition and fees will climb. Those are a lot of ifs, but there's another reason for signing up for the program: tax benefits. The purchaser doesn't have to pay federal tax on interest earned, and when withdrawn it will be taxed at the student's rate, which is usually lower. At the state level, the 1998 assembly approved a state income-tax deduction -- up to $2,000 per year -- for payments made to the program.
"That represents a $120 savings. It's money in your pocket at the 6 percent rate," says Howard Busbee, a tax partner in the Richmond office of Pricewater-houseCoopers. "The Virginia program is probably the most tax-efficient program in the country."
Want a better endorsement? Two years ago, Busbee purchased a contract to help manage his family's finances. "I bought one for my own child. She was a ninth grader" -- that's the last year a child is eligible.
There could be a reason to hold off, however: The governor is considering lowering tuition at the commonwealth's colleges. But in the long run the investment still could make sense. "If tuitions go down, mandatory fees could go up," Busbee says. "So I still think it's probably a good buy."
