Money
Education Savings Plans: What's Right for You

Q: My state gives a $3,000 deduction in income tax per child for the Section 529 education savings plan. However, the expense ratio in my state plan is much higher (1.25 percent plus fees for each individual fund) than the one I'm interested in (0.65 percent). I have two children and my tax bracket is 28 percent. Which plan is better for me?

A: These plans are a great option for college savings, but you need to consider the tax rate in your state and the performance of the two plans.

Suppose you put $1,000 in the plan and your state tax rate is 6 percent. You would save $60 in taxes on your money. But you would pay $12.50 a year in expenses. In the other plan, you would pay only $6.50 a year in expenses, but you would have to pay the $60 in taxes. If you look at that in isolation, the in-state plan seems to come out ahead. But low-expense funds are often better funds. Compare the performance of the two plans over a five-year period.

Q: Where can I get information on the catch-up provisions in a 403(b) plan?

A: These arcane rules allow participants to make extra contributions for five years if they did not contribute to the plan when they were entitled to or contributed less than the maximum amount.

If you are in that situation, you need to find an accountant who knows how to calculate your contribution. Someone in your school district or your 403(b) account provider, such as NEA Member Benefits, should be able to help you.

Q: Is there an investment that's good for both inflation and deflation?

A: Treasury inflation-protected bonds (TIPs) show some promise. The U.S. government guarantees that these bonds, introduced in 1997, will provide a return pegged to the rate of inflation. And, because bonds are a great investment in deflationary periods, TIPs look like a good hedge for the inflation/ deflation conundrum.

TIPs carry a fixed interest rate but the principal value is adjusted for inflation. Say you invest $1,000 in a 10-year TIP with a 3 percent coupon or interest rate. If inflation is 3 percent over the next six months, the principal of your bond is adjusted to $1,030 ($1,000 plus 3 percent) at the end of that period and your interest is $15.45 or $1,030 times 3 percent divided by two. According to a report on Bloomberg News, if inflation held at 3 percent over the 10-year life of your bond, you would get $351.56 in interest and your principal would grow to $1,344 at maturity. In a period of deflation, your principal would be adjusted downward for purposes of figuring interest payments. But the government guarantees return of principal at maturity.

There is a downside: The increase in principal is taxable as income in the year it accrues, even though you don't actually receive it until maturity. So in the example above, the $30 increase in principal would be taxable in the first year. That makes TIPs unattractive for taxable accounts.

For tax-deferred accounts, though, they're worth examining. A number of mutual funds offer TIPs: Vanguard Inflation-Protected Securities (VIPSX), PIMCO Real Return Bond Institutional (PRRIX), American Century Inflation Adjusted Treasury (ACTIX), GMO Inflation Indexed Bond (GMIIX), and 59 Wall Street Inflation-Indexed Securities (FNISX).

In the September Money column, I wrote that I couldn't open a checking account for my 16-year-old daughter. Many of you wrote to say I should keep trying.
One teacher said her parents opened a checking account for her at age 15 and she got an ATM card at 16, saying, "I believe that this is what helped me not to go crazy in college or as a beginning teacher." Another reader said that when the store where her 17-year-old son works wanted to make a direct deposit of his paycheck, the bank agreed to open a checking account for him.

I was delighted to hear of these successes. How will kids learn to manage money if we don't help them get started with checking accounts and ATM and credit cards?

Mary Rowland is an author and contributor to several financial planning magazines. E-mail your personal finance questions to MoneyQuestions@neamb.com

Thrifty Educator

This month's tip comes from Brigitte Smisek in Lynd, Minnesota:

On a regular-sized inflatable beach ball, write in the divided colored areas with a permanent marker the five themes of geography: location, place, region, human-environment interaction, and movement. Throw the ball to a student. The theme the student's thumbs land on will be the question he or she has to answer. If the student's thumbs land on "location," he or she will have to state the area's location (for example, southern hemisphere, between the Indian and Pacific Oceans). The student then passes it to another student. Be sure to stress rules for throwing balls indoors ahead of time. On nice days, move the class outdoors.

Beach balls can be used to study other topics, such as:

• elements of fiction--on the ball, write character, setting, plot, and theme.
• events in history--write who, what, why, where, when, and how.
• parts of speech--write noun, verb, adjective, preposition, adverb, and conjunction. Students can identify the parts of speech in sentences.

Deflate the balls when finished for easy storage.

Heads Up from NEA Member Benefits

The New Year is a great time to review family insurance and financial plans. Most members have life and health insurance, but other important types of coverage are often overlooked. Keep your family financially secure with these programs from NEA MemberCare®.

Members who are actively at work should have insurance to guard their incomes. If a disability occurs, the NEA Income Protection Plan can help replace lost wages. Find out if you need supplemental income protection by using our easy calculator. Call the number below and ask for Item #611.

If you're under age 50, secure your financial and retirement assets from the potentially devastating impacts of a serious illness with the NEA MemberCare Critical Illness Benefit. Upon diagnosis of a covered medical condition, this program provides a one-time, lump sum payment of up to $100,000 to spend any way you see fit. The program also pays the one-time benefit in the event of death.

If you are 45 or older, consider the benefits of the NEA MemberCare‚ Long-Term Care Insurance Program. With this coverage, you don't have to drain all your financial resources to pay for health care services provided in a nursing home, your own home, an assisted living facility, or other types of health care facilities. Family members, including parents and in-laws, are eligible for this coverage.

For more information on these plans, contact NEA Member Benefits at 800/637-4636, Monday-Friday, 8 a.m. to 8 p.m. (Saturday, 9 a.m. to 1 p.m.) ET. Or, visit www.neamb.com.