March 2006

This month’s Mike on Money discusses changes in the proposed Federal budget to college and retirement investment accounts which could greatly increase your pot of gold. .. Then we offer a "PS" showing how you can rescue your current retirement and college funds from exorbitant fees.

"No Bull" Saving for College and Retirement

Earlier in February, the President rolled out his 1997 budget containing some good news for college savers that may also benefit savings for everything else, if enacted. As explained below, you’ll have to act to reap the benefits

"529 Plans" were originally designed like IRA's, a savings plan with earnings tax deferred until withdrawn to pay education costs. The tax law changes of 2001 and 2003 made the withdrawals tax free, but only until 2010….. The new proposal would make the tax exemption permanent beyond 2010.. To quote Martha, “that’s a good thing”

Even better is the proposal in the new budget to create Lifetime Savings Accounts (LSA) in 2007. LSA’s, as proposed, would allow anyone, for any purpose, to make after-tax contributions to this investment. All withdrawals, at any time, would be tax free with no penalties. You’ll be allowed to contribute up to $5,000 annually on behalf of each person. You’ll be able to shift up to $50,000 of the 12/31/06 529 Plan balance for each child to an LSA …You’ll also be allowed to transfer up to $5,000 of 529 contributions per beneficiary made in 2006.

So, two actions everyone saving for college should consider. First, make the $5,000 contribution for 2006 to each child’s 529 plan. Second, if the LSA accounts do become law, make the transfers from your 529 plans… Brokerages, some of whose 529 plans are a good revenue source (for the brokerage, of course), may resist. The LSA will give you control over your investment choices (and the fees that go with them). Your money can be withdrawn anytime and for any purpose…. Find a way to fend off your broker’s appetite for your money if LSA’a become law this year

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PS Broker fees and expenses on 529 college plans are the single most important indicator of whether you’ll be able to afford that Ivy League tuition (not to mention law school to follow). Every dollar you give your broker’s kids will not be there for yours As illustrated here, with annual fees exceeding 2, and even 3%, some brokers have a bit of explaining to do.

Illustration of Annual Fees Charged by 529 College Saving Plans
	Annual	Annualized	Fees on	Total Annual Fees
	Maint.	Asset-based	Underlying	on balance of
	Fee (1)	Mgt Fee	Investments	$25,000
Utah's		0.25%	0.02% to 0.14%	$68 to $98
Ed. Savings Plan
Merrill Lynch	$50	0.50%	0.81% to 2.0%	$378 to $625
NextGen
Morgan Stanley	$30	0.50%	1.17% to 1.71%	$448 to $553
College SAVE
Legg Mason		0.72% to 2.23%	0.65% to 1.07%	$343 to $825
Core4College
NJ BEST		0.40%	0.45% to 0.84%	$213 to $310
Franklin
Tempelton
New York State		0.58%	N/A (3)	$290
Upromise
& Vanguard
(1) waived under certain circumstances
(2) vary for other product offerings by each  vendor
(3) NY includes all fees in  Asset-Based Mgt number
SOURCES: Company Prospectus and SavingforCollege.com

The CPA Journal published an eye opening analysis of the effects of fees and expenses on investment accounts. This is must reading for anyone saving for college or retirement. Please click here to understand how these costs might be eating into your future , and what to do about it .

Talk to you soon,
Mike