Marvin Appel, MD, PhD and Brian Hufford, CPA
In our August column, we showed that Coverdell Education Savings Accounts were the best available vehicle for college savings, provided your income is low enough to use them ($110,000 or less, if filing singly; $220,000 or less, if married filing jointly).
The 529 plans also are excellent investment choices to save money to be spent on college in 2010 and earlier, when investment profits can be withdrawn tax-free for this purpose. This month, we will explore the two remaining options for saving to pay for college if you do not qualify to open an education savings account and if your children will not begin college until 2011 or later. These options are 1) 529 plans and 2) tax-oriented, long-term investment strategies.
529 plans tie your hands
Because the selection of investments in a 529 plan is limited — and because you are allowed to reallocate your portfolio only once a year — 529 accounts expose you to roughly the same investment risk as buying and holding mutual funds in a taxable account.
The advantage of the 529 plan is the tax deferral of all investment profits, including ordinary income dividends from bonds. However, if you hold a tax-efficient equity mutual fund for more than a year, you qualify for the low, 15 percent tax rate on dividends and can defer any capital gains for as long as you hold the fund. These observations suggest the possibility that you should hold bond investments in 529 plan accounts, while holding stock investments in the lowest-cost, most tax-efficient mutual funds or in individual stocks.
The disadvantages of 529 plans include a lack of flexibility and higher expenses than you would pay with the most economical mutual funds held in an education-savings account. Vanguard and TIAA-CREF are the lowest cost 529 plan providers (apart from certain plan investments managed by state governments such as Utah's). But even the 0.65 percent per year that Vanguard or TIAA-CREF charges is higher than the 0.2 percent per year that you would pay Vanguard for similar holdings in an education savings or taxable account. Some states have contracted with large brokerage firms to run their 529 plans, where fees can top 2 percent per year, a level so high that it outweighs the likely tax benefits.
Here's some bond arithmetic — Vanguard total bond market in 529 equals the same return on a pretax basis as an average, intermediate term-corp bond fund, so it's better to go with the tax break. Compare the Vanguard total bond market in and out of a 529 plan and Vanguard total bond market in a 529 plan to Dodge and Cox Income in a taxable account.
Next month, we'll discuss stock investments best held in taxable accounts.
Dr. Marvin Appel is CEO of Appel Asset Management. He holds a degree in biochemical sciences from Harvard College and earned his MD in 1991. He is coauthor of Systems and Forecasts. Contact him at (516) 487-7146 or [email protected]. Brian C. Hufford, CPA, CFP, is president of Hufford Investment Advisory Programs, LLC, and Hufford Financial Advisors, companies dedicated solely to helping dentists secure solid financial planning and safe investment strategies. He can be reached at (317) 848-4987.
The article entitled "Bread & Butter procedures that ensure quick payoff on your new hard-tissue laser," written by Dr. Brendan Dwyer and published in the April issue of Dental Economics, contained errors in tables regarding citations from the ADA's Code on Dental Procedures and Nomenclature. The correct code for the article's first procedure scenario, osseous crown lengthening, should be "D4999 unspecified periodonal procedure, by report." The correct code for the article's second proocedure scenario, sulcular debridement, should be "D4240 gingival flap procedure, including root planing—four or more contiguous teeth or bounded teeth spaces per quadrant" and "D4241 gingival flap procedure, including root planing—one to three teeth per quadrant." This procedure may also be reported as "D4999 unspecified periodontal procedure, by report." DE regrets any inconvenience caused by these errors.
