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This Week In Your Wallet: Uncle Sam Is Eyeing Your 529 Plan

If you’re anywhere in the Northeast, I hope you’re reading this at home, preferably still in your pjs. I hope you’ve got a fire going and that you laid in plenty of supplies to get you through this terrible weather. If you’re bored, tweet me (@JeanChatzky) a picture from outside your window. I’ll retweet the best of the bunch. (P.S. If you want to send me a shot of the beautiful beach out your window, go ahead. Maybe as in the wonderful Leo Lionni book Frederick, it’ll raise memories that will keep us all a little warmer as we shovel out.)

Okay, let’s talk about your money. In last week’s State of the Union Address, the president proposed ending a popular tax break on 529 college savings plans. Right now withdrawals for qualified, college-related expenses are tax-free. Under President Obama’s new proposal, withdrawals on new contributions to 529s (i.e. your preexisting funds are grandfathered) would be taxed as ordinary income.

This isn’t exactly new. Before the Bush tax cuts of 2001, 529 contributions were made with after-tax dollars, your money grew tax-deferred and withdrawals (even for education expenses) were taxed as ordinary income. Since then, millions of Americans have been enjoying tax-free withdrawals for education expenses (i.e. tuition, dorms and books). And this preferable tax treatment is largely the reason assets in the plans have soared from $19.4 billion at the end of 2001 to $245 billion in 2014, according to the Investment Company Institute.

The President wants to roll the breaks back. Why? As he put it in the speech, “middle-class economics”: Fewer than 3% of families have 529s and too many of them are wealthy. If you have a 529 – or are looking to open one for a baby, child or grandchild – what does this mean for you? Likely that the Roth IRA, if you qualify for one, is a better alternative. I break it down in my Fortune column this week.

Slow and steady wins the race

Welcome to week four of the 52-week Savings Challenge. If you’ve been with me since day one, then you know the drill by now: save $4 this week for a grand total of $10 to date. New to #TeamJean? No problem. Start this week by saving $10, and next week you’ll save $5 along with the rest of us. And in one year, we’ll all have nearly $1,400 sitting in our savings. This brings me to this week’s savings tip: Stay the course.

Right about now you may be thinking, “I’ve been doing this for a month and I only have $10 saved!” There’s a reason we take it slow and steady, and that reason is backed by science. Think about running a 10K race. If you’re not a runner and you lace up your shoes and head out for a six-miler, you’re going to fail, and you’re likely going to hate it. But if you build by a half mile a week, or you walk/run until it becomes easier, you’ve got a greater chance of making it to your goal. It’s the same for your money. We’re getting you in the habit of saving.

Want more mind tricks to up your savings game? This Money.com piece offers seven psychological moves to make (like the one above) to get you in the right frame of mind for this challenge. For instance: Keep your eyes on one prize. Research from the University of Toronto says having too many money goals can stress you out and lead to failure. You’ll spend too much time considering tradeoffs and not enough time taking action. To be successful, focus on one goal at a time (like saving up to $1,400 by 2016). Another trick? Ignore the raises and bonuses you’ll likely receive this year. You’ll be tempted to spend all of it and then some, but you’re better off sending it straight to savings and acting like it never happened.

FICO scores now free for millions

With the growing number of free options for consumers, you’re running out of excuses for not knowing your FICO credit score – or at least having an idea of it, that is. As The New York Times reports, your FICO score, the widely used credit score created by the Fair Isaac Corporation, and used in in 90% of credit decisions in the United States (according to FICO) might be coming to a lender near you.

Last week Citigroup made free FICO scores available to all credit card holders on a monthly basis. Following suit, Chase will make FICO scores available to 10 million Slate credit card holders, Bank of America will offer scores “later this year” and Ally Financial will roll out its free FICO score program with car loan borrowers next month. Oh, and Sallie Mae is unlocking scores for borrowers of private student loans.

If you’re left with no outlet for a free FICO, then look to consumer finance sites (like SavvyMoney.com) that offer free scores. These aren’t the ones lenders will necessarily see, but they’ll give you a good idea of where you stand.

Tax season means tax scams

If you receive a call from an IRS agent, who demands you send money immediately, hang up. It’s a scam. As CNNMoney reports, the Treasury Inspector General for Tax Administration (TIGTA), which oversees the IRS, has received reports of 290,000 of these fraudulent calls since October of 2013 – and nearly 3,000 victims have lost $14 million. Scammers alter the caller ID number to make it look as if it’s the IRS office, targeting the elderly and immigrants. Some go as far to leave messages and send emails, saying it’s “urgent” that you call back with your financial information in hand. A real IRS agent will usually contact you by mail first, and never demand immediate payment via phone. If you receive a scam call, report it to the TIGTA here, or call 800-366-4484.

Have a great week,


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