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Save for a child's college education while
saving on income tax. How? This can be
accomplished several ways. You could be contributing to
a Coverdell Education Savings Account (formerly known
as the Education IRA). Up through the year 2001, the
maximum allowable annual contribution is only $500 per
beneficiary, i.e., child. The amount of the contribution
is gradually reduced, or phased out, for single taxpayers with
Adjusted Gross Income between $95,000 and $110,000, and
between $150,000 and $160,000 for married taxpayers filing
joint returns. In 2002, that limit has been increased to
$2,000. Phase out remains the same for single
taxpayers but increases to a range of $190,000 to $220,000 for
married taxpayers.
If you want more flexibility in the amount you
can put into a college savings plan each year, you can get it
by enrolling in a Section 529 Plan (also known as Qualified
Tuition Plans). Section 529 of the Internal Revenue
Code, enacted by Congress in 1996, complimented the prepaid
tuition plans that were already in existence and administered
by state governments. Since Section 529 Plans are
administered by states, the states have some control over the
upper limit of the allowable annual contribution; the limit is
usually over $100,000. You may set up a plan in any
state; your child does not have to attend college in that
state. Usually, the states will have an agreement with
one or more mutual fund in order to manage the funds received
from 529 Plan participants. You may establish 529 Plans
in more than one state; you might want to do this to achieve
greater diversification in your college savings plan. By
learning which mutual fund(s) a particular state uses, you
have some control over your investment objectives (growth
expected, level of risk, etc.), just as you would with
personal investments. Once your child begins college,
funds may be withdrawn from a 529 Plan and used for valid
educational expenses.
Can I contribute to both a 529 plan and a
Coverdell Education Savings Account? Yes, you may
now contribute to both on behalf of the same beneficiary in
the same year without penalty, but your contributions will be
treated as gifts subject to gift-tax limitations.
Rather than attempt to cover the many details
you should know about Section 529 Plans, we are directing you
to a Web site entirely devoted to this topic; it is Savingforcollege.com.
You may also want to consult with a personal financial
planner, accountant, estate lawyer, etc.
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