published Wednesday, January 9th, 2013

Personal Finance: Tennessee makes saving for college much easier

By Chris Hopkins

An early start on setting money aside for college is increasingly critical, given the rate of tuition inflation and the potential millstone of student loan debt.

Many parents and grandparents are aware of 529 plans, but until now the choices in Tennessee were limited and savers had to look outside the Volunteer state for optimal results.

Thankfully, Gov. Bill Haslam recently unveiled a great new Tennessee 529 plan called TNStars.

The plan is a real winner, with top-notch investment options and very low fees, and is open to participants from any state.

The state's less flexible legacy prepaid tuition plan was closed to new participants in 2010. Tennessee also had partnered with Georgia in a jointly administered plan, but has severed the arrangement in favor of TNStars.

Section 529 plans (so-called because of the IRS code section that authorized them) are the most attractive vehicles for college saving by far.

Funds contributed to a 529 saving account are invested according to the direction of the account trustee (called the "account owner," typically a parent or grandparent).

Investment returns accrue totally free of federal taxes, as long as the funds are applied to fund qualified higher education expenses. Over the 18 or so years from the child's birth to college entry, this could be substantial.

The definition of "higher education" is quite broad and encompasses any institution qualified to

receive federal financial aid payments, including many trade and technical programs, graduate and medical school.

There are no income limits or restrictions upon who may contribute to a child's account; in fact, the beneficiary need not be a child.

There also are no statutory time requirements; an account may remain in effect until (and if) the beneficiary attends school. If the funds are not used or not required, the account owner may designate another beneficiary in the same family (even in a different generation).

Contributions are treated as gifts from an estate-planning perspective, subject to the annual $13,000 gift tax exclusion per donor. A one-time, five-year gift of $65,000 may be made with the gift exclusions stretched over the five-year horizon. Tennessee allows total contributions of $235,000 per beneficiary.

As for the design of the plan, Tennessee took its time and definitely got it right.

The TNStars plan offers a robust slate of investment options including funds from respected mutual fund companies, an FDIC-insured interest-bearing account, and an age-based "auto pilot" option that calibrates risk based upon time until college enrollment.

Program fees, the perennial performance-killer, are extremely competitive in the Tennessee plan. And as an incentive to get started, the state is offering to match up to $50 through June 30 of this year, and throw in an extra $50 for rolling over balances from another plan (including the legacy TN BEST).

With tuition rising at twice the rate of inflation, an early start on college saving is a must. Thanks to Tennessee's new home-grown 529 plan, the job just got a little easier. Check it out at www.tnstars.com.

Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. Christopher A. Hopkins CFA is a vice president at Barnett & Co. Submit questions to his attention by writing to Business Editor Dave Flessner, Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by emailing him at dflessner@timesfreepress.com.

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