AVOID TAX

Send Your Grandkids to College and Avoid the Tax Man
Paying for a college education may be the greatest gift you can give. However, it may also be the most costly. It is no secret that college expenses have been rising at an alarming rate. According to The College Board’s report, “Trends in College Pricing” tuition has increased at twice the rate of inflation over the past 20 years (2001). This means in another 18 years parents can anticipate paying approximately $115,000 for total expenses at a 4-year public college or about $250,000 at a private institution (See chart below).Here’s what you can do now to help with the rising costs of a higher education in the future -- it’s called the 529 College Savings Plan. Named for a section of the Internal Revenue Code that permits very favorable tax treatment, this state sponsored college savings plan can bewithdrawn completely tax-free if the money is spent on qualified educationalcosts.Account owners can generally write-off up to $55,000 ($110,000 for marriedcouples) per beneficiary once per five-year period without incurring a federalgift tax. For example, an affluent couple can potentially send their 4grandchildren to college and immediately eliminate $440,000 (4 x $110,000)from their taxable estate.Besides the tax incentives, there are some additional features that make 529sa logical choice for college funding. There are no age or income limitationsand the contribution limits are high, some reaching $268,000. Account ownerskeep control of the assets. If, for any reason, the owner must close theaccount, a penalty of 10% will be assessed on the earnings and the balancemay be used at the owner’s discretion. In addition, 529s offer the ability tochange the plan’s beneficiary. So if little Johnny decides to skip college theaccount can be reassigned to his little sister. If she wins a scholarship, themoney can even be withdrawn without a penalty.Each state's 529 plan has its own features and benefits. All state plans arenot created equal; some state plans are better than others. (Be cautious,some state plans do not offer diversified portfolio options.) Fortunately, moststate plans allow you to invest across state lines, meaning that if you don’t likethe plan your state has to offer, you can look to other states and go with a planthat you’re comfortable with. Currently very few states offer tax breaks on their529 plans, so investment selection and management experience should carrymore weight when choosing a plan.With a college savings plan, you may select investment options based uponyour goals and time horizon. One of the more common investment choices isbased on the current age of the beneficiary. Investment allocations will changeover time, so that the older the child gets and the closer he/she gets to collegeage, the more conservative the underlying investments become.Figuring out the various tradeoffs among the different plans can be quite confusing. No particular type of account or investment option is appropriate for every investor. Make sure you consult with a well-informed investment advisor prior to investing.