Saving for College:
Plans Require Careful Investigation

In February, Harvard College announced a new financial aid policy designed to help students afford its $45,000 annual tuition. It is a clear reminder of the escalating costs of a 21st century college education. Tuition cost increases continue to outpace inflation.^*

While most students won't be attending a college in the Ivy League, the figures may give you pause if you are a parent or grandparent contemplating future higher education costs for young children. Reviewing and comparing the various 529 plans, the Coverdell Education Savings Account or the Uniform Gift to Minors Act now may give your family time to prepare for the future. Your choice of plan will depend on your own expectations and your idea of what is best for you.

529 Plan Possibilities

Section 529 college savings plans come in three possible formats. Two are prepaid tuition plans, allowing you to lock in today’s college tuition costs. However, 529 state prepaid plans are usually designed to apply only to in-state public colleges and universities, while so-called Independent 529 plans do the same for approximately 250 participating private colleges.

The 529 savings plan most often discussed, available in most states, has no annual contribution limit and allows your money to grow tax-free. Your withdrawals are tax-free as long as the funds are used for higher education purposes. Those include tuition, books, fees and even room and board, with some limitations. The investment end of the plan is typically contracted to large mutual fund companies. A cap is set by each state according to how much it would cost for five years of education at that state’s most expensive college -the maximum currently is approximately $320,000. Most plans offer a variety of conservative-to-aggressive equity investments. Growth depends on the performance of the market, just like any other equity or bond investment you may have.

Invest in Any Plan

You can enroll in any state’s 529 plan, although it may pay to investigate your own state plan first. Many states offer residents tax breaks on contributions. From the federal standpoint, all contributions to any of the plans mentioned here are made with after-tax funds. The money in 529 plans may be withdrawn at any time, but the IRS collects a 10% penalty and applies the relevant income tax rate to any earnings withdrawn but not used for qualified educational purposes.

One aspect of 529 plans has particular appeal to contributors - the account holder retains control of the assets, though the funds in the plan are not considered part of the contributor’s estate. Beneficiaries can be changed, and should the child in question not attend college, the contributor can even use the funds to pay for his or her own adult education.

Coverdell and UGMA/UTMA

Distributions used for qualified educational expenses from a Coverdell ESA are also tax-free, but this plan has more limits than 529 plans. The first is the $2,000-per-year contribution limit per beneficiary (even if various relatives contribute to separate Coverdell plans for the same individual, the total cannot exceed $2,000). In common with the other plans, contributions are not tax deductible. All manner of mutual fund and financial service firms offer Coverdell accounts; in most cases, the account holder can choose the investment mix. Withdrawals may be used to pay for any educational expenses, K-12, as well as college. In most cases, assets in the plan must be distributed once the designated beneficiary reaches age 30.

Unlike the other plans, college savings held under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), while controlled by the owner, in fact belong to the beneficiary and must be spent on his or her behalf. The money cannot be retrieved by the contributor. Furthermore, when the beneficiary reaches age 18 (or up to 25, depending on the state of residence) ownership of the funds is transferred to him or her. There is no contribution limit, and the funds can be used for anything that benefits the minor, but earnings are taxed at the minor’s tax rate. And, as the funds are considered a student asset, the account can play havoc with scholarship eligibility. If you’re already the owner of an UGMA or UTMA, there is a provision you should be aware of, however. While it is a taxable event, it is possible to withdraw those funds and invest them in a 529 or Coverdell college savings plan.

While some plans would seem to have advantages over others, the details often point in a specific direction that would be best for your family’s goals. I’ll be happy to help you consider the alternatives. Just give me a call.

^*Source: BusinessWeek.com, October 22, 2007.

“Dear Beneficiary,” — An Estate Planning Gambit

Of all the awkward conversations involving families, few are more difficult than discussing the dispersal of your estate. Experts in the field agree, it can be up there with sex and politics.

In fact, discussing your plans with your beneficiaries may be even more important, because your family members will find their own ways through the other aspects of their personal lives. Your estate plan, however, is your own creation. Your actions can help create family harmony, and you may be able to dispel any hurt feelings and dissension if you effectively communicate with your beneficiaries as you create or change your plans.

Write a Letter

If your family is spread out around the country, you could write letters to your beneficiaries. Explain what your plan provides and tell them how they will benefit from your estate. Let your children know how much money they can expect, and when — that is, if you have established a trust, clue them in as to when and how distributions will be made. If you intend to leave a considerable sum to charitable causes, tell your family.

Everything you write in your letter can be discussed at family meetings, but estate planning specialists suggest that even if your family isn’t geographically dispersed, letters can substitute for the family meeting. One benefit is that you can craft your presentation just as you wish, achieving the tone you intend, especially when addressing potentially awkward inheritance situations.

Keeping Records

While you’re writing things down, don’t forget to keep your beneficiaries informed about your financial assets and their locations. At least make sure your executor has the details of every 401(k), annuity, IRA, life insurance contract, government bond, mutual fund and bank account. List key advisors, with phone numbers and addresses. Grieving relatives will find their lives even more miserable if they are left guessing where your assets are or how to claim them.

How you wish to communicate with your beneficiaries is up to you, but if I can be of assistance in helping you decide what and how to do it, please don't hesitate to call.

For a Thoroughly Diversified Portfolio, Think Globally

Considering that aside from the indigenous population, the United States was settled by people who crossed the seas to get here, the insularity of American investing seems puzzling. Figures show the United States accounts for slightly less than half of the world's market capitalization. Yet, even as professionals recommend that as much as 35% of an investor’s equity portfolio should be invested abroad, most choose to stay home.

Investors may not realize just how much the world has changed. International investments have generally been riding high for the past few years, and while returns in future years may not be as generous, genuine opportunities remain. Modernization abroad may slow, but it’s unlikely to stop altogether.

Investing abroad also provides you with a hedge against the U.S. dollar, because foreign firms earn their returns in their own currencies. With the dollar weak, as it has been for several years, you gain when foreign currency earnings are converted into U.S. dollars. However, it is wise to avoid investing in countries prone to devalue their currencies, and keep in mind that should the dollar strengthen, that fact alone could dampen future international returns.

Fast Times Abroad

To anyone who watches the news, it’s relatively easy to appreciate that much of the developing world is beginning to catch up with the more advanced countries. They’re moving fast, constructing highways, installing urban infrastructure, setting up modern communications networks and upgrading housing. Many countries are slowly but surely putting in place laws and regulatory safeguards designed to reassure investors who once feared that graft and corruption would steal away the value of their investments.

But if you make a decision to diversify your portfolio through international exposure, where do you begin?

For the more adventurous, there are few limits. Investing in emerging markets in Europe, Latin America and Asia can be accomplished through a variety of investment alternatives, whether they be the stocks of individual companies, mutual funds or exchange-traded funds. Such markets, though potentially rewarding, are likely to be fairly volatile; political and economic turmoil is a possibility. Investing in companies in more developed countries is likely to be less volatile, but returns may not be as impressive.

Going Large

International small- and mid-cap firms may offer the greatest potential for investors, but the large-cap firms usually take a less nerve-wracking path to success. Large, well-established industrial, infrastructure and telecommunications firms are based everywhere from the European capitals to Singapore and Kuala Lumpur. Many offer solid investment prospects.

If you’re not adventurous, you may want to follow the popular path of gaining international exposure by choosing American firms with a truly global income base. Large, global oil companies fit obviously into this category, but so do firms in several other sectors.

Don’t overlook the overnight parcel delivery companies and suppliers of industrial gasses and healthcare products that compete in a global marketplace. You may even find some surprises. Pizza in India? Yes. Giant retailers Pizza Hut (NYSE-YUM) and Domino’s (NYSE-DPZ) are battling for market share. Both report impressively high annual growth rates in India -30% and 55%, respectively.

If you are comfortable with the idea of diversifying by adding to your international investment portfolio, please give me a call. Together, we can explore the alternatives that would best suit your financial goals.

Investing in small- and mid-cap stocks generally involves greater risks, and, therefore, may not be appropriate for every investor. International investing also involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. Also, investing in emerging markets can be riskier than investing in well-established foreign markets. Diversification does not ensure a profit or protect against a loss. Investing involves risk and investors may incur a profit or a loss. There is no assurance any of the growth trends mentioned will continue in the future.

Closing prices on Wednesday, February 26, 2008, for the stocks mentioned were: DPZ $13.74; PZZA $24.73; YUM $36.77. Further information is available upon request.

Know Your Limits:
Don’t Ignore Retirement Plan Contribution Ceilings

A surprisingly large number of Americans saving for retirement ignore the rising ceilings on IRAs and other retirement savings vehicles. The result can be missed opportunities and a far smaller retirement nest egg than imagined. Two years ago, 96% of respondents told a mutual fund company survey they were aware of the current IRA contribution limits, but many seriously under-guessed the maximums.

For the record, the traditional IRA and Roth IRA limit for 2007 was $4,000 ($5,000 for those 50 and over). For 2008, contribution limits rose to $5,000 ($6,000 for those 50 and over). If you’re still under the 2007 ceiling, you have until April 15 to make your final contributions. Finished with 2007? Then it's a good idea to make your 2008 contribution as early as possible. Early contributions give your investments a chance to grow and also gain during the year through the distribution of any dividends and/or capital gains.

Depending on your income level, you may be able to contribute the maximum both to your 401(k) ($15,500 for 2008; $20,500 if you’re over 50) and an IRA. That could be $20,500 in tax-advantaged retirement savings for 2008 ($26,500 if you’re 50 or over). In your retirement years, you’ll be glad you paid attention.

Investmentmyth

“Don’t invest your rainy day funds.” — It really is a good idea to keep an emergency fund of three to six months of living expenses set aside in case your income suddenly drops. However, there’s no need to stuff your money under the mattress. Make it work for you while it waits by earning at least a moderate return in an easy-access money market fund or in laddered certificates of deposit.