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Tax-Reduction Strategies Education Plans It's time to consider how to best invest your money to fund your child's education. Education costs continue to climb faster than the cost of living. Fortunately, you have a number of tax-advantaged ways to invest in your child's future, including an education IRA (now known as the Coverdell education savings account), a custodial account and a Section 529 plan. Coverdell Education Savings Account (formerly Education IRA) The Coverdell Education Savings Account (ESA) is a tool to help you save for future higher education and qualifying primary and/or secondary school expenses. Distributions may be made for qualified primary school expenses, including tuition, academic tutoring, books, supplies, room and board, transportation and computer equipment. The AGI (adjusted gross income) phase-out range for a married couple filing a joint return to make a contribution has been modified to remove the marriage penalty. This AGI range will be $190,000 to $220,000. Contributions are made with after-tax dollars. Funds accumulate tax deferred. Distributions for qualifying expenses are tax-free. All money in the account must be distributed or transferred to another family member by the time the named child attains age 30. Custodial account A custodial account is also called a UGMA (Uniform Gift to Minors Act) and UTMA (Uniform Transfer to Minors Act). Funds given to a minor are held in the name of a custodian under the minor's Social Security number for the child's benefit. Advantages Money is taxed at the child's tax bracket. Disadvantages Once the child reaches the age of majority, he or she can withdraw the money. Money in a custodial account is considered when determining qualification for educational aid. 529 Plan Qualified tuition programs (Section 529 plans) offer flexible, tax-advantaged options. You can contribute very small amounts or up to $11,000 per year tax-free to an investment account that accumulates tax deferred for qualified higher educational expenses (tuition, room and board, books, etc). And under the new tax laws that became effective January 1, 2002, in-kind or cash distributions from state plans used to pay for qualifying higher-education expenses will be excluded from gross income. Assets in the account can be used toward any eligible two- or four-year college, university, graduate school or vocational training institution anywhere in the United States. Allows after-tax contributions into a state-sponsored plan where fund may be withdrawn tax free for qualified educational expenses Maximum tax-free contribution is $11,000 per year, but an accelerated contribution of $55,000 for five years may also be made. Please note, Section 529 plans are municipal securities, may lose value and are not government- or FDIC-insured. The value of an investment in a Section 529 plan will fluctuate and, when withdrawn, may be worth more or less than its original cost. There is no guarantee that the plan will grow to cover college expenses. 529 Plans are subject to enrollment, maintenance, administration/management fees and expenses. Unless Congress extends the current law, any earnings withdrawn from a 529 plan account after 2010 will be subject to federal income tax. In addition, some states offer favorable tax treatment to residents only if they invest in their state's own 529 plan. You should consult with a tax advisor regarding the state tax consequences of any investment in a 529 plan. < PREVIOUS NEXT > #38599