More options at hand to send children to college |

More options at hand to send children to college

Jeffrey Apps and Tracy Tutag

It’s that time of year again when clients’ questions turn to college funding. Tax law changes in 2001 allowed parents – and grandparents, friends and family – to 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 the age of 18. There are several differences between these two types of college savings vehicles:– Contribution limits to Education IRAs are much lower than Section 529 Plans.– Education IRAs may be used to fund qualified primary or secondary educational expenses, as well as college expenses.– Contributions to your own state’s 529 Plan may provide state income tax deductions.Parents, grandparents or any United States citizen may contribute up to $2,000 yearly per child under 18. While Education IRA contributions are not tax-deductible, any earnings are tax-free and they may be withdrawn tax-free for qualified educational expenses.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 are named for the section of the Internal Revenue Code that created them. These plans are offered by individual 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, depending on the state plan selected. In addition, most states allow contributions from out-of-state residents and permit you to contribute to more than one state plan.As with Education IRAs, contributions 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. State plans are tax-free beginning in 2002. Distributions from plans sponsored by colleges will be tax-free starting in 2004. Under sunset provisions Section 529 tax rules are scheduled to expire on Dec. 31, 2010, unless extended by Congress.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 United States – not just in the state where the plan is located. The Colorado state plan, College Invest, is available directly and through most financial planners. You can contact them at 1-800-College.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 percent 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.According to, one year’s expenses for a student at See Apps and Tutag, page B19Stanford University. For example, is $38,821 in 2003-04. With the cost of four years at a top private college already exceeding $120,000, therefore, 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 concerning your particular circumstances.Jeffrey Apps and Tracy Tutag offer securities and investment advisory services through AXA Advisors, LLC (member NASD, SIPC) 1290 Avenue of the Americas, New York, NY 212-314-4600 and offers annuity and insurance products through an insurance brokerage affiliate, AXA Network, LLC and its subsidiaries. They can be reached locally at 926-0601 or

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