Cents and Sensibility
Cents and Sensibility
Question: What investments are best to finance a child's or grandchild's college education? Education IRA, 529 plan
help finance collegeAnswer: With college costs rising each year, it's important to begin saving for this expense as early as possible. Two of the newest vehicles for saving for a college education are the Education IRA (Coverdell Education Savings Account) and the 529 College Savings Plan.
An Education IRA can be set up by anyone who is interested in setting aside dollars now to pay for future higher education expenses. Once an Education IRa is established, anyone -- a family member, friend or the child -- can contribute to it as long as they meet the adjusted gross-income limits. For single filers, those limits range from $95,000 to $110,000, and for married couples filing jointly,the limits range from $150,000 to $160,000.
Up to $500 currently can be contributed annually, on a nondeductible basis, per child to an Education IRA, and contributions can be made until the account holder reaches age 18. Beginning in 2002, this annual limit will increase to $2,000. All contributions to an Education IRA grow tax-deferred, so you don't pay taxes on the earnings on the account. As long as distributions from the Education IRA are used for a qualified expense of the account holder, the distributions are tax-free and penalty-free. Qualified expenses include tuition, room and board (under certain circumstances), books and supplies necessary for enrollment.
Another option is the 529 College Savings Plan. Parents, grandparents and others can contribute as much as $10,000 per year per beneficiary without exceeding the annual federal gift tax exclusion. Contributions are not federally tax deductible, but your earnings grow federal and, in some cases, state income tax deferred. And beginning in January 2002, you may benefit from tax-free withdrawals.
You can withdraw the money to pay for tuition or other qualified higher education expenses, such as fees, books, supplies and equipment and, subject to some limitations, room and board.
When it comes to saving for a college education, the sooner you begin, the better.
Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com