As the holiday shopping season intensifies, the Education Trust Board of New Mexico is reminding New Mexicans that gifts toward a child’s education can be deposited not into a Christmas stocking or under a mattress, but in a state savings plan where gifts may grow over time.
As the costs of post-secondary education mount, paying for college or vocational school requires students to assemble multiple resources including scholarships, financial aid, loans and personal savings. For the latter, New Mexico is offering some help.
The Education Plan is a college savings plan with state tax advantages, high contribution limits (but no minimum), and the benefit of a professional fund manager. An account can be opened by anyone, even if they are not related to the beneficiary.
The accounts are managed as investment funds, such as stocks and bonds, and returns on the investment are not guaranteed, although investors can select different levels of risk.
New Mexico residents can deduct their contributions from their state taxable income. The fund grows tax-free and withdrawals are also protected from taxes if they are spent on qualified education expenses.
Ted Miller, the trust board’s Executive Director, said the program, begun in 2002, manages $560 million with approximately 22,000 individual accounts.
“We have had a number of folks use this plan very successfully over the years,” Miller said. “We track our data very carefully and we know that tens of millions of dollars have come out of this program and have been used to pay for education expenses.”
Qualifying expenses
Those expenses may include tuition, room and board,and supplies such as books and computer equipment used for education. The institutions may include public or private universities, community colleges and vocational schools, graduate and professional programs.
Students with special needs can even use 529 withdrawals to pay for wheelchairs or other equipment necessary for their education, or for remedial tutoring.
Every state offers 529 plans, named for the corresponding section of the Internal Revenue Code, but the trust board says New Mexico is one of just four that offer an unlimited deduction for contributions.
“You can put any amount of money that you wish, up to the state’s 529 maximum account size limit of $500,000,” Miller said.
Although K-12 expenses can also be paid from 529 accounts, doing so may cancel the tax protection for the amount withdrawn.
What about Coverdell accounts?
Another well-known instrument for college savings are Coverdell Education Savings Accounts, formerly known as “the Education IRA.” Coverdells have a broader range of accepted expenses while offering similar tax advantages.
On the other hand, Miller pointed out that contributions are only accepted until the beneficiary turns 18, and the money must be distributed no later than age 30. If it isn’t spent on education, the money becomes taxable income for the beneficiary.
Mark Kantrowitz, a financial aid expert and publisher of SavingForCollege.com, has reported extensively on the comparative advantages of 529’s and Coverdells. He told the Sun-News that 529’s likely work best for most families.
“Few investors can consistently beat the S&P 500 or a total stock market fund for 17 years,” he said, noting that 529’s like New Mexico’s invest in a variety of stock and bond mutual funds with age-based levels of risk, gradually moving to more stable investments with lower returns as the beneficiary approaches college age.
Another problem is that Coverdells allow contributions of only $2,000 per year. That isn’t sufficient, said Kantrowitz. “If your goal is to save one-third of future college costs, you should be saving $250 a month from birth for an in-state public four-year college, $450 for an out-of-state public four-year college, and $550 for a private four-year college. $2,000 a year falls short.”
If in doubt, Kantrowitz suggests: “Go with the 529 plan. They have the best tax advantages and the best financial aid advantages.”
