Learning about college savings plans could save you from high charges and low tax benefits: Internet Scambusters #454
Before we get into the subject of this week's Scambusters issue, we wanted to sound an alert about a clever and nasty email that's currently circulating under the guise of a New York state speeding ticket notice.
Titled "Uniform Traffic Ticket" and disguised so it appears to have been issued by the city (the bogus address looks like it's from "nyc.gov") it carries a harmful attachment, masquerading as the ticket.
DO NOT CLICK ON IT! The attachment, called "ticket.zip", contains malware that installs on your PC.
And watch out for similar emails purportedly from other states. Remember, they don't send out traffic offense notices by email. Please pass on this warning to others.
College savings plans are a great, tax-beneficial way of investing in your childrens' education, but each one is different from the rest.
Unless you know your stuff, you could be lured into the wrong program that either doesn't offer the best tax savings or charges a high overhead fee.
As we explain in this issue, that's because some brokers only offer one or two from the dozens of plans available, while online ratings system may mislead.
On to today's main topic...
Financial Watchdog Sounds College Savings Plans Warning
Ignorance, unscrupulous brokers, and misleading ratings systems could be directing parents into college savings plans that fail to give them the best return for their money.
Also known as 529 college savings plans (named for the tax code section that relates to them) these programs enable families to accumulate savings that enjoy federal tax relief plus other tax benefits at state level, but in some states only.
The result is that there are now an estimated 80-some state-sponsored college savings plans and pretty much every one of them is different from the others.
That makes finding your way around them a complex business -- even for the experts -- and, unless you're careful, you may never be offered the best college savings plans for your particular needs.
In addition, the plans can be built on stock market investments ranging from high-risk equities to more traditional mutual funds, so your savings could be jeopardized if they're not properly managed.
In a famous case back in 2009, a bond fund linked to four college savings plans lost a massive amount of money by getting involved in the mortgage-backed securities business, leaving victims in a financial mess.
And earlier this year (2011), the Financial Industry Regulatory Authority (FINRA) fined the financial advisory subsidiary of a leading bank half a million dollars for alleged poor oversight of a 529 college savings plan.
Furthermore, the amount of fees charged both by plan managers and by any brokers you use can vary significantly, adding to the cost and undermining your savings strategy.
So, while we're not suggesting a broker or adviser might be out to scam you (though a handful possibly are), this is definitely an area where, if you're considering college savings plans, it pays to do your homework.
In a nutshell, college savings plans work in a similar way to 401K or IRA programs.
You set up an account in the name of the student into which you normally make regular payments.
Earnings inside the plan are not subject to federal tax and money can be withdrawn to cover college expenses, including tuition and supplies.
As mentioned earlier, some states, especially the home states of savers, may also offer tax benefits.
Note, though, that in either case your contributions to a plan themselves are not deductible.
You can set up the plan either directly with a state (or their official broker-dealer) or use an investment adviser or brokerage firm as an intermediary to do the work for you.
And there's the rub. If you follow that course, not only will you likely pay a fee or "sales load" but you may be guided into a college savings plan that doesn't make sense for you or even one that has unacceptably high risks.
According to an alert issued by FINRA:
"Some brokerage firms and advisers offer only one or a very limited number of 529 plans. The options may not include your own state's college savings plan and may not provide you the opportunity to invest in college savings plans issued by other states, even though those other 529 plans may have lower sales loads, lower expenses, or may provide state tax advantages that are not available when invested in the plan being offered."
For instance, some states that don't tax earnings from their own college savings plan may tax withdrawals you make from another, out-of-state plan.
"As we found," FINRA adds, "investors can be persuaded to put money into a 529 college savings plan that offers them no in-state tax breaks."
Alternatively, investors could be guided into a plan that does provide state tax breaks but charges higher fees or has a poorer performance record.
This is such a critical subject for anyone trying to plan ahead for the increasingly expensive cost of sending a student to college that it's definitely worth spending time to make sure you don't lose out.
Finding the Best College Savings Plans
Here's what to do:
- Learn as much as you can about college savings plans. A good starting point is this introduction from the Securities and Exchange Commission (SEC).Another useful site is the College Savings Plan Network, which is an affiliate of the National Association of State Treasurers.
- Read the warning from FINRA: College Savings Plans--School Yourself Before You Invest.Here you'll find an 8-point plan that suggests starting by exploring your home state, asking brokers how many plans they offer, and comparing performance and expenses associated with various plans.FINRA also urges caution about using online ratings for 529 college savings plans, warning that some of them take little account of tax benefits or expenses levels.
- Seek independent advice from a tax or financial adviser you trust.
- Be very cautious about unsolicited telesales calls promoting particular college savings plans -- again, check with an independent expert.And don't believe anyone who tells you that using a certain plan will increase a student's chance of getting into college; it won't.
- Explore other educational savings programs, like Prepaid Tuition Plans and visit FINRA's Smart Saving for College.
Financing several years at college for the student(s) in your family is expensive enough. Make sure you don't add to the burden through a poor investment and tax strategy. Get to know your college savings plans!
That's all we have for today, but we'll be back next week with another issue. See you then!