| Sargent & Lundy Savings Investment Plan |
| A UNIQUE APPROACH TO COLLEGE SAVINGS |
| The following information is from an article in the Fall
1998 issue of "Fidelity Focus" magazine. The UNIQUE product discussed
is currently offered only by Fidelity Investments. The opinions expressed
may or may not reflect those of the SIP Committee, nor is the Committee
recommending or endorsing this product.
Last year, in the 1997 Taxpayer Relief Act, Congress provided for some enhancements to qualified state tuition plans, which are defined under Section 529 of the Internal Revenue Code. That cleared the way for states to develop a new type of college savings program. Tax-deferral. From a tax standpoint, federal tax on the account earnings is deferred until you withdraw the money. Then, as long as the money is used for qualified educational expenses (tuition, fees, etc.), any gains are taxed at the beneficiary's (the student's) rate, which will usually be lower than the participant's. In some cases, the earnings are free from state taxes, too. In some of these new 529 plans, the account stays in the participant's name (and under his or her control to disburse for educational purposes), while a child is named as the beneficiary. But that beneficiary can be changed among family members without penalty, so a participant can shift funds form one child to another if one child decides not to attend college. Flexibility. The plans also address one drawback of some of the existing state prepaid tuition plans. The money in these new programs can be used to pay college bills at any accredited post-secondary school, anywhere in the country, not just in the state that is sponsoring it. You can also save for more than just tuition; costs such as room and board, required supplies and equipment (all of which can add up) can be paid for from one of these plans. Higher limits. These plans may be a little easier on the financial aid picture than, for instance, UGMA or UTMA accounts. Since the assets are considered to belong to the participant (i.e., the parent or grandparent), rather than the beneficiary (the child), they can be better for financial aid eligibility than funds held in a child's name. Unlike the Education IRA, anyone can participate, regardless of their income. And while the maximum contribution to an Education IRA is only $500 per year, state-sponsored college savings programs often allow $100,000 or more to be invested in a single year. Under federal law, a participant may invest up to $50,000 in a single year on behalf of each beneficiary without incurring a federal gift tax. (This requires that no further gifts are made over the five-year period, and that the gift is treated as a series of five equal, annual gifts.) Another flexible feature of these new 529 plans: Funds and investment earnings can be withdrawn for any purpose, such as a financial emergency. Taxes would be due, of course, and federal law requires that the state impose a penalty on earnings withdrawn, since they have grown tax deferred. Federal law prohibits participants from directing their own investments in these plans. Instead, the state usually provides a single investment program. Some states are planning to invest in a conservative portfolio of treasury securities; others will be looking to the equities markets to seek the higher returns that are more likely to keep pace with college inflation costs. Fidelity's UNIQUE College Investing Plan The UNIQUE Plan, which is sponsored by the state of New Hampshire and administered by Fidelity, allows anyone, regardless of state residency, to save for the future costs of higher education on a tax-deferred basis. That means no federal income taxes need to be paid on your contributions' earnings until you decide to withdraw the funds at college time. And when the funds are withdrawn to pay for qualified higher education expenses, they are taxed as income to the child, whose tax rate will likely be lower than yours. Better yet, investments in the UNIQUE program can be made regardless of income levels, and you can invest up to $50,000 in one year without having to pay federal gift tax. Investments made on behalf of a child are invested in a portfolio of Fidelity mutual funds designed according to the child's age. Since under federal tax law you are not allowed to direct the investments yourself, Strategic Advisers, Inc., a Fidelity Investments company, will allocate your money to one of seven portfolios based on the beneficiary's age. Each portfolio's blend of stock, bond, and money market mutual funds will be adjusted regularly as the beneficiary gets closer to college age. For example, investments made on behalf of a preschooler will be invested in a high percentage of equity funds and then shift gradually to bonds and money market instruments as the child gets older. Although neither Fidelity nor the state of New Hampshire guarantees any particular rate of return, the portfolios have the potential to beat college inflation rates. The UNIQUE Plan offers a number of other significant benefits not found in other college savings programs, including: * Flexible contribution schedule Accounts can be opened for a little as $50 per month with automatic payments, and participants can invest up to a little more than $100,000 per beneficiary. * Use for tuition, room, board, books, required supplies, and other qualified expenses at any post-secondary institution in the United States. * Flexible access Investments in the plan must be used for higher education, but if the beneficiary (the child) does not attend college, the investments can be used for another family member of the beneficiary, including adults. Participants may also redeem investments for purposes other than high education, with the earnings subject to income taxes and a 15% penalty. To find out more on how the UNIQUE College Investment Plan can help you save for higher education, contact a Fidelity program representative at 1-800-544-1914. |
This page updated on 9/4/98