Saving for college

Maine has taken the lead in helping families put aside money for college and at the same time save on their taxes. But not enough Maine families know about it and take advantage of it.

Here’s the way it works: You go to a participating bank, savings institution or investment firm. You start an investment plan with as little as $50. And you designate a young child or grandchild or family friend as the beneficiary. Most banks are taking part in the plan.

The investment can be on the risky side -in stock funds – with a possibility of bigger gains or sometimes big losses. It can be in low-risk bonds and money-market funds, almost the same as cash, which should earn lower but steadier returns. Or it can be your choice of a mixture of the two.

Federal income taxes on the gains are deferred until the money is withdrawn for college expenses. Even then, they are not taxable at the participant’s rate but at the beneficiary’s rate. Still better, if either the participant or the beneficiary is a Maine resident, the gains are exempt forever from the Maine income tax. Also, Mainers don’t have to pay a $50 annual fee charged to outsiders.

The NextGen College Investment Plan, as it is called, was negotiated by Maine Treasurer Dale McCormick and is administered by the Finance Authority of Maine (FAME). It went into effect last year and already has attracted $374 million in total investments. “We went from zero to 90 miles an hour in 15 months,” she says.

But people in other states are far ahead of Mainers in taking advantage of the Maine plan. Only 7 percent of the accounts and 4 percent of the assets are in Maine. That’s because Merrill Lynch financial consultants are peddling it all across the country.

McCormick is continually negotiating improvements in the plan, including the addition of additional fund groups. She looks for it to extend to index funds next year. She expects it to provide special incentives to bring in low-income families who have not yet felt able to save for college. She hopes the “529 Plan” will become as famous as the 401(k). (The nickname for the new plan comes from the IRS regulation that permits it.)

Aside from what it can do for Maine families, the NextGen Plan funnels .15 percent of all contributions back into Maine to finance Maine scholarships and incentive measures. And 10 percent of the investments classified as cash are invested in certificates of deposit in Maine institutions to help grow the Maine economy.

If it sounds like a good deal, talk to your bank or your broker. But, as they always say, read the fine print.