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College Savers May Do Better Out of State

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TIMES STAFF WRITER

California’s Golden State Scholarshare Trust is still on hold, but some state residents aren’t waiting to contribute to a tax-deferred college savings plan.

Hundreds of Californians have already opened accounts with one of the other 10 states that allow nonresidents to participate in their 529 plans, named after the IRS code that endorsed them in 1996.

College savings plans let parents and others put aside money that can grow tax-deferred for a child’s education; the money is taxed at the child’s rate when withdrawn to pay tuition and other education costs. Proceeds can be used at any accredited institution in the United States, so children aren’t limited to in-state schools.

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The plans also offer powerful estate-planning advantages. A grandparent, for example, can contribute up to $50,000 to a grandchild’s college savings plan account in one year without triggering gift tax rules.

Because the person contributing to a plan can change beneficiaries or withdraw the money at any time, college savings plans allow contributors to move assets out of their estates while allowing them to keep control of who gets the money. Most other estate-planning transfers, such as Uniform Transfers to Minors, require the donor to give up control of the money, typically when a child turns 18 or 21.

The plans’ advantages have prompted Californians to open more than 2,200 accounts with Fidelity Investments Corp.’s year-old Unique College Investing Plan, a college savings plan offered through New Hampshire and Delaware, among other states, said Fidelity spokeswoman Cari Kaye. Of the 16,500 contributors in the plan--who include residents of all 50 states, as well as Puerto Rico, Guam and the Virgin Islands--12% are grandparents while 82% are parents, Kaye said.

A few Californians--55 at last count--have opened accounts with the New York plan run by TIAA-CREF, the pension-fund giant that will administer California’s plan. New York state offers its residents a $5,000 tax deduction for contributions, said TIAA-CREF spokesman Tom Pinto. Neither the federal government nor California offer tax deductions for contributions.

The accounts themselves, however, can grow free of federal and state tax, whether the contributor lives in New York or California. California has opted to honor the tax-deferred status of other states’ plans, said Jim Shepherd, spokesman for the state Franchise Tax Board.

California’s plan, which was scheduled for launch in early July, is still waiting for approval from the Securities and Exchange Commission.

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Growing interest in college savings plans has resulted in some states improving their plans to attract out-of-state investors, said Joseph F. Hurley, a certified public accountant and author of “The Best Way to Save for College,” a guide to college savings and prepaid tuition plans.

Newer plans tend to have lower management expenses and better options.

Arizona allows contributors to choose between two investment management companies and select their own asset allocation. Most other state plans, including California’s, offer contributors no control over how their money is invested. Typically, portfolios are allocated according to a child’s age, with the proportion of money in stocks declining as the child nears college age. Some states, including Utah and Montana, avoid stocks altogether, investing the money instead in interest-bearing accounts such as certificates of deposit.

TIAA-CREF’s California plan will invest a maximum of 75% of its youngest beneficiaries’ portfolios in stocks, while Fidelity’s Unique plan invests 88% of newborns’ accounts in equities.

Hurley praised TIAA-CREF’s New York plan, which allows a maximum 55% stock allocation, as one of the nation’s best for its investment returns, its high $100,000 limit on lifetime contributions and its low .65% annual investment management cost. The California plan is expected to mimic New York’s, while offering a greater proportion of stock investments and imposing slightly higher fees of up to .8%.

Among the states that offer college savings plans with stock investments, only Iowa’s has lower costs than New York’s. Iowa’s fund invests in four Vanguard Group LifeStrategy Portfolios with annual costs of .29%, but the maximum contribution per donor is limited to $2,000 a year.

Connecticut and Rhode Island offer plans administered by Collegiate Capital Group Inc. that start accounts for its youngest beneficiaries with 70% domestic stocks, 20% international stocks and 10% fixed income, but the accounts come with annual expenses of 1.55%. Indiana’s plan has a mix of 80% stocks and 20% fixed income until a child reaches age 11; the accounts carry annual expenses of up to 1.75%.

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For more information on college savings plans, visit https://www.collegesavings.org. For details on California’s plan, go to https://www .csac.ca.gov/scholar/scholar.htm.

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