College Savings: Follow the Obamas?

PHOTO Parents are liquidating or reducing their contributions to their 529 accounts

Buried in the news about President Obama and his wife, Michelle, earning more than $2.7 million last year was the disclosure of a rather important investment -- and possible loss -- in a nest egg that many view as just as important as savings for a home or for retirement: the college savings plans for the couple's two children.

The Obamas last year invested $240,000 in what are known as 529 college savings plans -- state-run investment vehicles designed to help parents reap tax benefits while saving for their children's college tuitions -- according to 2007 Senate disclosure forms and the couple's 2008 tax returns.

The Obamas -- who have two daughters, Sasha, 7 and Malia, 10 -- contributed $120,000 each to two different plans: one geared toward children up to age 8 and another for those between 9 and 12 years of age. Both plans are part of Illinois' 529 program, the Bright Directions College Savings Plan Program.

But, assuming the Obamas stayed true to their selections, right now their investments aren't looking so bright.

According to the program's Web site, the two plans saw substantial losses over the last year: the age 9 to 12 plan lost at least 27 percent of its value and the newborn to age 8 plan dropped at least 34 percent.

The White House did not respond to requests for comment on the accounts.

The stock market's precipitous decline since the start of the recession means that the nation's first family is hardly unique in seeing their college savings deteriorate.

But the Obamas, like other families with young children, have time on their side. If the market recovers by the time the girls attend college, their 529 plans could save the Obamas tens of thousands of dollars.

It all has to do with the tax advantages associated with 529 plans, experts say, and they can benefit both wealthy families -- the Obamas included -- and average Americans alike.

Why Invest in a 529?

State 529 plans are a relatively recent option for parents -- the oldest plans date back to 1996 and their popularity has grown ever since.

While investors do pay taxes on their contributions to 529s -- unlike, say 401(k) plans, where investors contribute pre-tax dollars -- earnings garnered from the plans aren't subject to federal taxes. Some states even let taxpayers deduct the first $10,000 contribution each year from their state taxable income.

Take the Obamas: If the first family saw their college savings plan investments grow by $100,000 by the time the girls matriculate, they could apply that money directly to their daughters' tuition costs. If they saved $100,000 outside of the plan, the taxes levied on those savings -- say, in the 35 percent tax bracket, currently the nation's highest -- would likely mean that the Obamas would ultimately contribute about $35,000 less to their daughters' education.

"The point is they'd have to put a lot more money in later on to get the same amount available for the kids' college education," said Tom Ochsenschlager, the vice president of taxation for the American Institute of Certified Public Accountants.

Taxed Less, Saving More

The Obamas also took advantage of a 529 feature that particularly appeals to wealthy individuals -- they front-loaded their contributions for five years.

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