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August 19, 2010


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I love my 529 plan also because I can deduct what I contribute from my Michigan taxes. You can choose a plan from any state, regardless of where you live, so do a lot of research and pick the best plan for your circumstances.

One possible rub I see with a tax-deferred account:. YES, dividends grow tax free until withdrawal, BUT dividends are taxed at a lower rate maxing out at 15%, while withdrawals from a tax-deferred account will be taxed at whatever your rate is at that time.

Hence one forgoes a maximum tax rate of 15% on dividends in exchange for tax free growth with a possibly higher tax rate at withdrawal.

NOTE: my understanding is that these tax rates may be a moot point come 2011 (lots of tax law changes afoot),

Many companies also offer a Roth 401k, which is like an employer sponsored Roth IRA.

The problem with 529 plans is that even though you can invest in any of the 50 states' plans, you are still limited, and frankly, most states' 529 plans were set up not based on any evaluation of how good certain funds are but rather, what fund is somehow politically connected. The majority of them are garbage. The pre-paid 529 plans are good in theory, but there are already several states who have defaulted on those plans. Check the status of your state's treasury fund and operating budget before going that route.

A Coverdell is much better, IMHO, because you can invest in anything you want. Yes, there is a $2k per year limit but honestly, if you invest $2k per year for 18 years and get a decent rate of return, you have covered a good chunk of college costs. Even at a 5% rate of return over 18 years, you are looking at $60k. That may not pay for 4 years at Harvard but it will pay for the majority of the costs of 4 years at State U. If my kid wants to go to Harvard, he/she can get a scholarship or take on some debt himself/herself.

An HSA is great because they are one of the few things that are tax free going in AND coming out, as long as they are used for qualified Medical expenses.

I love the HSA not just for financial reasons, but because I can use the money for my own orthodontic and elective procedures such as laser eye surgery. Most corporate health plans just cover your dependents up to age 25 for orthodontia, and do not cover elective procedures for the plan participant. You can also buy unlimited contact lenses, have teeth whitening that are also not covered under most corporate vision and dental plans. You can buy aspirin, stop-smoking drugs, orthopedics, and elective chiropractic care--pretty much anything for health and well being, except maybe for breast or penis enlargement.

There is no mention of Qualified or Non-Qualified Annuities. These are very useful planning tools for people with limited resources and periodic expenses.

Furthermore, Life Insurance is often overlooked in the discussion of tax-advantaged vehicles. All of the vehicles mentioned above have contribution limits... Life Insurance does not. Life Insurance has no early withdrawl penalties, no account maintenance fees, and competitive returns. The returns can and often do beat the performance of actively managed portfolios. There are ways to take money out of policies tax-free, maintaining tax-deffered cash value growth and the policy's tax-free death benefit. Life Insurance can be an ASSET CLASS.

I am not suggesting that everyone should buy Life Insurance for this purpose. Life Insurance is purchased first and foremost for the death benefit, and in many cases it is unsuitable for accumulation.

I participate in my employers 401 k plan. I am over 50 years old. My contribution this year will be about 4k to the 401k. My gross earnings will be about 60k this year,and after deductions my AGI should be under the limits. If I understand your post I can still contribute $6000 to a tax deductable IRA for 2010 or do I have to limit out my 401k plan first. Thanks in advance----Paul

Regarding the 529 savings plans, MasterPo read in the details for the NY plan that 529 plans MUST be included on the Federal Financial Aid form regardless of the owner.

And since colleges use the FFA to determine their own financial aid, ergo, colleges do take 529's into consideration.

First, colleges don't take the 529 investment into account when they calculate a student's financial aid, because the account isn't in the student's name. Second, if the current 529 beneficiary ends up getting a big scholarship, you can change the beneficiary.

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