College Savings Plans

Educational IRA’s — Section 529 Savings Plans

Educational IRA’s or education savings accounts are currently the best way to save money for your child’s college fund. With state-sponsored college savings plans, earnings are free of federal income tax starting in 2002 if the money is later used to pay for qualified college expenses. This does not include paying for a new car, stereo or vacation! Here are the details:

One educational IRA can be opened per beneficiary and a non-deductible contribution of $2,000 can be made to an educational IRA by a parent, grandparent or any other person.
No contribution is allowed when the modified family annual gross income reaches $220,000. The full $2,000 contribution is available if income is below $160,000.
Contributions are allowed for both educational IRAs and 529 College Saving Plans in the same year.
Growth within educational IRAs is NON-TAXABLE and money eventually removed from educational IRAs is TAX-FREE if used for qualified educational expenses.
Qualified educational expenses include elementary, secondary and college expenses.
The contribution deadline is April 15 for the prior year.
Contributions may be made by corporations and tax-exempt entities
If the money is not spent or used for educational purposes for the designated person, then the educational IRA can be rolled into an educational IRA for a broadly-defined family member of the original beneficiary.
Withdrawals from educational IRAs not used for educational related expenses may be subject to both income tax and a 10 percent IRS penalty tax.
Various mutual fund investment choices for funding are available.
All mutual funds, variable annuities and variable life insurance policies are offered by prospectus ONLY. For complete information, including charges and expenses, obtain a prospectus and read it carefully before you invest.
Mutual fund, variable annuity and variable life prospectuses are available directly from the issuing companies and are included when product information is requested. In some cases, they may be downloaded directly from the issuing company’s Internet Web site.
Systematic and dollar cost averaging within mutual funds, variable annuities and variable life insurance policies do not assure a profit and do not protect against loss in declining markets. It involves continuous investment in securities regardless of fluctuating prices and the investor should consider his or her financial ability to continue making purchases through periods of low price levels.
Investing in stocks, bonds, mutual funds and variable annuities does not guarantee a profit. All of these investments can lose money.

To find out more, visit www.collegesavings.org.

Federal Tax Benefits - Hope and Lifetime Learning Tax Credits

Students or parents may be eligible for a Hope or Lifetime Learning Federal Tax Credit that lets taxpayers write off college costs dollar-for-dollar when they file their taxes.

The Hope Credit is worth up to $1,500 for each student enrolled at least half time for the first and second years of college. It’s calculated at 100 percent of the first $1,000 in out-of-pocket costs for qualified tuition and related expenses and 50 percent of the second $1,000 for these college expenses.

The Lifetime Learning Tax Credit picks up where the Hope Credit leaves off. It covers 20 percent of a family’s tuition expenses, up to $5,000, for any postsecondary education and training, including graduate and professional study and half time study.

Both tax credits have income limitations. The credit will increase in 2003 to 20 percent of expenses, up to $10,000. There is no limit on the number of years the Lifetime Learning Credit can be claimed.

Deduction for Education Expenses
You can deduct qualified tuition and related expenses from your taxable income. This deduction follows the same guidelines as those for the Hope and Lifetime Learning Credits, but you can’t claim both the deduction and one of the tax credits for the same expenses.

Student Loan Interest Deduction
Taxpayers can deduct from their taxable income up to $2,500 in interest paid on student loans each year for the life of the loans. Borrowers may deduct interest paid on student loans they received for their own education or for their spouse’s or child’s education. This deduction has income limitations. Parents cannot deduct interest paid on a student loan taken out by their child even if they’re paying the interest costs.

Educational IRAs
Investments of up to $2,000 per year per student into an educational savings account grow tax free if the money is used later for qualified college or K-12 school expenses.