College Savings Plans

Tax deferral - it's not just for retirement anymore
Most of the time, we think of tax-advantaged savings in terms of our retirement plans, IRAs and annuities. That infers that the money is generally being saved for our retirement. But with the costs of higher education becoming such a big issue for most people who intend to send children to college, there's good news. Tax advantages can now be applied to college funding plans. Here are a couple of prominent options:

Education IRAs
This vehicle has been around for a few years, but it will soon get better. Through 2001, the annual contribution limit for the benefit of any individual was $500. In 2002, that limit increased to $2,000 (couples with incomes up to $190,000 qualify for the full annual contribution). Education IRAs let you choose from a wide variety of investment options, so almost any investment is available. All contributions amount to an irrevocable transfer of assets to the student, and usually it comes without any state tax deduction. If used for qualifying educational expenses, including kindergarten through high school expenses, all withdrawals can be made tax-free.

529 plans
This is another tax-advantaged savings plan that is administered by individual states. By now, most states have such a plan in place, and most that don't are likely to by the middle of 2002. This allows large sums to be invested for the benefit of a child (sometimes up to $200,000 or more over the life of the plan). In some states contributions can be deducted from state taxes, and the state determines a limited number of investment options that you can consider for your investments.

As this chart shows, large regular contributions to a 529 plan can allow your money to grow more dramatically, as taxes are not factored into the equation.

So while the cost of higher education continues to rise, at least the government is giving you a tax break on the money you save for the cause. In today's volatile markets, you may find that such a balanced approach to investing is more important than ever.

Content is for informational purposes only and may not accurately reflect your specific situation. Information is not intended to provide financial, legal, tax, or accounting advice. You should consult a qualified advisor for advice specific to your own circumstances.