Community Magazine July - August 2003

s ” xc Save More for College Anyone saving for a child's education got a big gift from the new tax law passed in 2001. Both Education IRAs and Section 529 Plans were changed in ways that will let you potentially save more for college expenses. Both Education IRAs (known under the new law as Coverdell Education Savings Accounts or CESAs) and Section 529 plans offer tax-free growth of any investment earnings and tax-free withdrawal of proceeds for qualified educational expenses, which makes them attractive if you are saving for the education of a child, grandchild or any other child under age 18. There are several differences between these two types of col- lege savings vehicles: • Contribution limits to Education IRAs are much lower than Section 529 Plans • Education IRAs may be used to fund qualified primary or sec- ondary educational expenses, as well as college expenses • Contributions to your own state's 529 Plan may provide state income tax deductions Education IRAs/CESAs Starting in 2002, joint filers with income below $190,000 may contribute up to $2,000 yearly per child under age 18 (up from $500 in 2001). While Education IRA contributions are not tax- deductible, any earnings are tax-free and they may be withdrawn tax-free for qualified educational expenses. These expenses include not just college-related expenses (e.g., tuition, room and board, fees, etc.) but, as a result of the new tax law, qualified expenses related to primary and secondary school. The Education IRA thus offers one of the few meaningful ways to save for pre- college educational expenses. Section 529 Plans Section 529 Plans are named for the section of the Internal Revenue Code that created them. These plans are offered by indi- vidual states and colleges. They are usually run by professional money managers, and generally offer several investment choices and features. An advantage of Section 529 Plans is that contribution amounts can be quite large-as much as $200,000 or more per child, depend- ing on the state plan selected. In addition, most states allow con- tributions from out-of-state residents and permit you to contribute to more than one state plan. As with Education IRAs, contribu- tions to Section 529 Plans are not tax- deductible, although some states offer state tax deductions to residents who participate in their own state's plan. Like Education IRAs, investments in the plan grow tax-free. What has changed in the new tax law, however, is that withdrawals from these plans are also now tax-free. Different states have different types of plans. With most plans, you can use the value accrued in your plan for any accredited institution of higher learning in the U.S.-not just in the state where the plan is located. With both Education IRAs and 529 Plans, you can withdraw money in the account for any reason, although you will pay taxes and may also be subject to a 10% federal tax penalty on the accrued earnings if withdrawals are made for non-educational reasons. You can also change the beneficiary and there are no tax consequences as long as the new beneficiary is a member of the same family. Now is the Time to Save for College With the cost of four years at a top private college already exceeding $120,000,** there is no time to waste in putting money aside for educational expenses. Whether the child is a few months old or nearly college-age, talk to your financial advisor now about ways to make college a reality. This article is not intended to provide legal or tax advice. AXA Advisors and its affiliates do not provide legal or tax advice. Please consult with your attorney or tax advisor for advice con- cerning your particular circumstances. * For state plans beginning in 2002. Distributions from plans sponsored by col- leges will be tax-free starting in 2004. Under "sunset provisions," Section 529 tax rules are scheduled to expire on December 31, 2010 unless extended by Congress. ** According to the College Search tool at collegeboard.com, one year's expenses for a student at Stanford University is $35,576 in 2001-02. Take Advantage of Tax Law Changes for College Education Marc Strent, CFP, ChFC, CLU, LUTCF Registered representative of AXA Advisors, LLC (member NASD, SIPC) 1111 Marcus Avenue, Suite 100, Lake Success, NY 11042 Insurance agent of AXA Network, LLC, an insurance brokerage affiliate, offering life insurance and annuities of The Equitable Life Assurance Society of the United States (New York, NY), an affiliated insurance company, and the insurance products of over 100 unaffiliated compa- F I N A N C I A L F I N E S S E