Money
College Savings--The Name Game

Q: We want to set up a college savings account for our baby. Should we put the money in her name?

A: Most experts would say no. The most common way of putting college savings in a child's name is with a uniform gift to minor's account or UGMA. When you put money in this account, it becomes the property of the child although, as custodian, you could use it for certain of the child's needs such as private school tuition. You could not use it simply to pay living expenses for your child.

The conventional objection to these trust accounts is that they belong to your child when she reaches the age of majority in your state, and she can do whatever she likes with the money, like buy a Corvette or head for Hawaii.

And there are other negatives. Until your daughter is 14, the earnings on the account are taxed at the parent's highest marginal tax rate, which provides little tax incentive for the trust account. Worse yet, money in the child's name counts against her if she applies for financial aid for college. In fact, I've been looking at colleges with my daughter and most admissions officers tell us that putting money in the child's name drastically reduces your chance of getting financial aid. That's because colleges consider this money in the child's name available to the child for college costs, but recognize that parents have many other obligations. Although I do have UGMA accounts for my children, I don't think I would start one today.

This shouldn't discourage you from starting a savings plan for your daughter, of course. But you're probably better off to earmark it as college funds rather than to put her name on it. The 529 plans offered by various states are worth looking into. Earnings on these plans are free from tax if used for educational purposes. In some states, like New York, you can get a tax deduction for putting money into the plans.

Q: What do you think about using a home equity credit line? My wife is very conservative and afraid to borrow against our home.

A: Your wife is wise to be cautious. I certainly wouldn't borrow money on my home to invest in the stock market or to go on vacation. But a home equity credit line can be a boon if used judiciously. The interest paid on a home equity line is tax deductible up to $100,000 over the amount you originally financed on your home. So if you took out a $150,000 mortgage, you could deduct interest on $250,000 of mortgage and home equity debt combined. I might use a home equity line to borrow money to buy a car or to pay off credit card debt because interest on consumer debt is not tax deductible.

Staying completely out of debt is best, of course. And it's important for your wife to feel comfortable about your finances. But I like the idea of having a home equity line set up for emergency use. I've used mine three times when I got in a pickle and then paid it off as soon as possible.

Q: The company that handles my school district's 403 (b) plans put too much money in my plan. I was permitted to take $10,000 in 2001 and the company withheld $15,000 and deposited it in my 403 (b) account. What should I do?

A: Since your question is somewhat unclear, I am assuming you mean that you contributed $15,000 in 2001, but then found out that the maximum allowable contribution was $10,000 and you are now concerned that you over-contributed. 403 (b) plans do have a "catch up" provision, which allows participants who have contributed less than the maximum amount in earlier years--or who have not contributed at all when they were entitled to--to contribute extra in order to catch up.

Usually, the payroll clerk within each school district handles salary deductions. So, I recommend you talk to your school district office, your accountant or financial representative, and also the company that provides your school district's 403 (b) plan to determine how best to handle the situation.

Q: I want to find a stock that trades for $2 or $3 a share because that's what I can afford. Do you have any recommendations?

A: No. Bargain hunting in the stock market is different from bargain hunting at Sam's Club. The price of a stock doesn't give you the information you need to decide whether it is a good buy. Bargain hunters look for stocks trading below their actual value. That means a $75 stock might be a bargain if the investor decides it's really a $100 stock that has been depressed in price.

Stocks that trade under $5 are referred to as "penny stocks." (The $5 definition is a result of inflation.) Most investors consider penny stocks to be higher risk investments than pricier stocks. For instance, I have some stocks, like Corning and JDS Uniphase that were expensive a few years ago and now trade for a couple bucks. They are priced so low for a reason. The market considers these penny stocks a long shot. They're not a good bet for novice investors.

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

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Thrifty Educator

This month's tip comes from Tammy Huffman in Castlewood, Virginia.

Attention thrifty music teachers! Ever wonder what to do with left-over wrapping paper?

Turn the paper to the white side and use black tape to outline a five-line staff. Add bar lines, but do not include a clef sign, time signature, or notes (students can do that later). Laminate the project and get the washable markers ready!

Children are now ready to create their own melodies and short rhythmic patterns. Laminate several sheets and the students can work in small groups.