We are often faced with the daunting task of financing our children’s college, postgraduate or professional education. 529 plans are tax-advantaged strategies that are available to help save for higher education expenses. The 529 plans offer federal tax incentives. Contributions are with post-tax dollars. Earnings are tax-deferred—if the plan’s funds and earnings are used for qualified higher education purposes, they are never taxed. Qualified purposes may include tuition for higher education, fees, books, supplies, computers, internet fees, room and board.

529 contributions are usually viewed as gifts to the beneficiary and may thus be limited to $14,000 per year (married couples can double this). This will increase to $15,000 per year per person beginning January 1, 2018. Savings can be accelerated by giving five years of gifts at one time. In New Jersey, the total amount that can be contributed for a single beneficiary is $305,000. There is no time limit for using the 529 funds. In the event the primary beneficiary does not utilize the 529 funds, they can easily be transferred to another family member—child, grandchild, stepchild, sibling, stepsibling, parents, grandparents, stepparent, uncle, niece, nephew, son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, sister-in-law, spouses of any listed relatives or first cousins.

Every state offers 529 investment plans—these vary in cost and in profitability. There are basically two types of college-savings plans that are offered by the various states. They are age-based or target-date funds. The former shifts the percentage of asset investments from primarily stocks to bonds as the stated beneficiary ages. This should reduce the portfolio volatility as the target date approaches. Static investments may disregard this dynamic portfolio rebalancing. While every state offers 529 plans, individuals are not limited to their state or any other state. In many cases, the state funds provide state tax advantages to its residents. However, New Jersey offers no state tax breaks to its 529 investors. New York State does offer state tax benefits to its 529 plan investors.

MorningStar^® is an independent investment research firm that primarily evaluates mutual funds and related investments, along with 529 plans. MorningStar^® offers five rating grades—Gold, Silver, Bronze, Neutral and Negative. The New Jersey 529 College Savings Plans have a Neutral rating by MorningStar^®. A MorningStar^® analyst states, “considering the lack of state tax benefits, residents and nonresidents alike can find better plans elsewhere.” If possible, view the 529 Plan investments as you would any other mutual fund investments. Evaluate the investment style, the performance and the fees charged. Those New Jersey residents who have New York State income can contribute to a New York State 529 plan and may receive a state tax deduction of 7 percent up to $5000 for singles and $10,000 for a married couple.

By appropriate gifting, it may be possible to transfer substantial assets from one’s estate into 529 funds. A married couple could move five years of $15,000 contributions from each spouse ($150,000) to each 529 fund for as many children, grandchildren or great-grandchildren as they desire.

529 savings plans have become important in financing higher education. Selecting the optimum funds presents many choices and you may benefit from professional advice. Savings plans may be administered by states only with administrative services usually delegated to a mutual fund or financial services firm. U.S. News & World Report’s recommendations for New Jersey residents are listed below in Table I¹. For your 529 investment consideration, this list provides a useful starting point.

Out-of-State Plans Available to NJ Residents

By Norman Sohn, MD, MBA

 Norman Sohn received his MD degree from New York University and his MBA from Fairleigh Dickinson University. He completed a 15-month course in financial planning. Since his retirement from his position at Lenox Hill Hospital in 2010, he has been working at Beacon Wealth Management, LLC — a financial planning and wealth management firm in Hackensack. He completed his Series 65 examination, which qualifies him as an investment professional and allows him to operate as an Investment Adviser Representative. He also passed the Chartered Retirement Planning Counselor examination, which provided him with the designation CRPC®. He lived in Englewood for over 40 years and for the past four years has been married to Lois Blumenfeld and living in Teaneck. Together, they have seven children, 26 grandchildren and a host of great grandchildren. He is an active member of Congregation Bnai Yeshurun. He can be reached at [email protected].