By Jill Schlesinger
Tribune Media Services
Every few months, I like to empty out the inbox, which has definitely piled up. I will answer a variety of your questions. As a reminder, if you have a financial question or a comment about a column, send it to: askjill@jillonmoney.com. If you would like to be a guest on my syndicated radio show, call 855-411-JILL.
Q. I have 3 young grandchildren, and my broker suggested that I open 529 college savings accounts for them. Although I live in New York, he has recommended a plan from Rhode Island. When I saved for my own kids, I used custodial accounts, so I am not as familiar with a 529. Is there any reason that I would use a R.I. 529 versus one from NY? – Delia
A. 529 plans are operated through states and allow you to save for higher education in a tax-effective way. Here’s how they work: You invest an after-tax dollar into a 529 and then choose from a variety of investment options, which usually include different kinds of mutual funds. The money grows without any current taxation, and when the child is ready to attend college, it can be withdrawn on a tax-free basis to pay for qualified education expenses.
While I agree with the advice to establish a 529 plan as the college savings vehicle, it makes little sense for you to use a plan from RI. The main reason is that, as a N.Y. resident, you would be missing a great opportunity. Some states, like N.Y., offer special state tax benefits to residents. New York allows for a state income tax deduction of up to $5,000 per year by an individual, and up to $10,000 by a married couple filing jointly (only contributions made by the account owner, or if filing jointly, by the account owner’s spouse, are deductible). If you were to use the R.I. plan, you would forego that extra tax benefit.
Perhaps you are wondering why on earth your broker would suggest the R.I. plan. The most likely answer is that the R.I. plan would pay him a commission. Skip the extra cost, grab the extra benefit and go directly to www.nysaves.org to enroll. You can research 529 plans at www.savingforcollege.com.
Q. I offered to help my son and his wife with the downpayment on their home. When they went through the mortgage application process, the bank asked for my bank statement. Is that customary? I don’t feel comfortable sending the details of my finances. – John
A. The mortgage process has changed dramatically since the housing boom and bust. Not only do borrowers have to provide lots of information, but when a gift is involved, the lender is likely to ask for a donor letter/affidavit and could require the donor’s account statements to verify the source of funds. According to mortgage brokers, this new twist has more to do with rules to prevent money laundering than for underwriting purposes. Bottom line: If you want to help your kids, you need to comply with the new rules.
Q. I have run the numbers and have determined that with my pension and retirement savings, I can probably retire as early as age 55, though I was planning to keep working until 59 1/2 so I could tap my 401(k) account without penalties. Recently, a co-worker told me that I could use something called Rule 72-T to get the money earlier. Is that true? – Jerome
A. IRS Rule 72(t) allows for penalty-free withdrawals from a retirement account before age 59 1/2, as long as distributions are made as part of a series of substantially equal periodic payments over your life expectancy. The account owner must take at least five substantially equal periodic payments, and the amount depends on the account owner’s life expectancy calculated with various IRS-approved methods. If you want to take advantage of Rule 72(t), you must separate from service with the employer maintaining the plan before the payments begin.
Keep those questions coming, readers. I enjoy hearing from you!
Jill Schlesinger, CFP, is the Emmy-nominated, Senior Business Analyst for CBS News. A former options trader and CIO of an investment advisory firm, Jill covers the economy, markets, investing and anything else with a dollar sign on TV, radio (including her nationally syndicated radio show), the web and her blog, “Jill on Money.”
She welcomes comments and questions at askjill@jillonmoney.com.
This was printed in the November 17, 2013 – November 30, 2013 Edition
