It is projected that, by 2010, a four-year college education could cost between $85,000 and $400,000, depending on whether you choose a private or state-funded institution. Given the magnitude of this expense, you can't begin to prepare too soon. You may need the help of student loans, but there are other tax-advantaged ways to pay for education. And, you can include your children and their grandparents in the planning process. Here's how:

• Set up an Education IRA
  The Taxpayer Relief Act created the Education IRA, allowing $500 annual contributions per child. These contributions, although not tax-deductible, may be withdrawn tax-free as long as they go toward higher education costs. Contribution eligibility is phased out for higher-income individuals and couples.

• Set up a custodial account under the provisions of the Uniform Gift to Minors Act (UGMA) or the Uniform Transfer to Minor Act (UTMA)
  For children under the age of 14, the first $700 of income generated from these accounts is tax-free. The next $700 is taxed at the child's own rate, usually 15%. Any income in excess of $1,400 is taxed at the parent's rate. After the child reaches age 14, any income generated by the accounts is taxed at the child's rate.

• Consider a Section 529 College Savings Plan
  These state-sponsored savings plans typically have no income restrictions and allow for relatively large contributions that can exceed six figures, in many cases. The funds are invested in a family of pre-selected portfolios according to the age of the student or the years to enrollment in college. While contributions are not federally tax-deductible, they may be deductible on state or local tax returns. Assets in the plan grow tax-deferred, until withdrawn for qualified education expenses (tuition, room and board, and supplies). Penalties apply to non-qualified withdrawals.

Coming up Next
Come back for A Lesson on the Education IRA.

Meeting Your Goals
Contact Keith Driscoll, Financial Consultant, at Salomon Smith Barney with any questions or comments. Please call 800-336-0156, or email keith.p.driscoll@rssmb.com, for a complimentary consultation on college expense funding.

Salomon Smith Barney does not provide tax or legal advice. Please contact your tax or legal advisor for guidance.

[ Learn More About Kieth Driscoll | Check Out Our Message Boards |
Back to Experts' Advice | Ask A Question ]