You�ve probably heard or read of them - state ponsored 529 college savings programs. There are others available as well; the newly enhanced Education IRA and the old favorite, UGMA and UTMA accounts. Determining which type of savings plan is right for you depends on several factors. Among them: your income, the child�s age and how much you�ll be relying on financial aid. In some cases, your best option may be to take advantage of more than one account. I�m going to focus on the 529 today.

Let me begin by sharing a great website with you. It is www.savingforcollege.com and is authored by Joe Hurley, It is full of timely, pertinent information and articles that will expand on what I�m writing here.

The recently passed Tax Cut made tremendous improvements to higher education finance. The new law substantially raises the amount that can be contributed to education accounts. It�s increased the number of people eligible to save and makes 529 plans even more appealing. Currently, earnings accumulate on a tax-deferred basis and withdrawals from these accounts are taxed at the child�s rate. Starting in 2002, they will be free of federal taxes! Yes, you read that correctly, tax-free withdrawals (if it�s for qualified educational expenses).

529 plans are named for the section of the tax code that created them in 1996. The vast majority of the plans allow nonresidents to participate, which means you can choose virtually any state�s plan regardless of where you live or where your child is likely to attend school.

Unlike Education IRAs, 529s have NO income limits or age restrictions, so anyone can participate. You could even set one up for yourself. Some plans will let you invest more than $200,000 per beneficiary, and there are no annual limits. And, if your child doesn�t end up using the money � maybe she�s received a full scholarship � the assets can be transferred to a sibling or first cousin.

You, as a parent, could open a 529 for your children, and grandparents could have one for the same children. You, the donor, are the owner of the account. Your child is the beneficiary. You remain in control of the monies over the account�s lifetime. You decide when withdrawals are taken and for what purpose. If your child uses some of the funds for higher education and is through, with money to spare, you can name another beneficiary and start the routine all over again. As long as the beneficiaries are some form of blood family member you can change beneficiary as needed.

The changes to 529 plans that begin next year could literally buy you an extra year of college. Let�s say you invest $60,000 in a 529 plan for your son. Assume the account doubles in value by the time he heads off for school, representing a $60,000 gain. Under the previous rules that profit would have been taxed at the child�s 15% tax rate, reducing the account by around $9,000. That�s nearly a year�s worth of tuition and expenses at a public college. Now, that $9,000 stays available for tax-free withdrawal for those same expenses.

So what if your only beneficiary decides not to go to school? There�s no time limit on this account, you could change the beneficiary to your spouse, who always wanted to return for his/her Masters. You could let it sit and grow while the child works for a few years and then decides to go to school, or if not that, decides to get married and has a child of their own.

You could then change the beneficiary on that account to your newest grandchild and it lives still in its tax-deferred state. And if you are feeling generous, you could change ownership of the account to your child (who is now fully grown and very responsible). Of course, there may be gift tax consequences to that last part, so don�t do anything without checking with us. The point is that it is flexible.

Worst case, what happens if your child doesn�t go to college, or if there�s more in the account than is ultimately needed? Federal law requires that the 529 plans charge you a penalty if a withdrawal isn�t used to pay qualified higher education expenses. Based on IRS guidelines, most states will collect a penalty of 10% of the earnings portion of the �nonqualified� withdrawal. This means you�ll get back 100% of your principal and 90% of your earnings.

That penalty, however, will be charged at your income tax rate not the student. The penalty is usually not charged if you terminate the account because the beneficiary has died or become disabled or if you withdraw funds not needed for college because the beneficiary has received a scholarship.

The gift and estate tax treatment of an investment in a 529 plan is, to quote Joe Hurley, �a good news, bad news situation�. The bad news is your contribution is treated as a gift to the named beneficiary for gift tax and generation skipping transfer tax purposes and so you need to be aware of this exposure especially if you are making other gifts to the beneficiary during the same year.

The good news is that your contribution qualifies for the $10,000 annual gift tax exclusion and so most people can make fairly large contributions without incurring the gift tax. If you make a contribution of between $10,000 and $50,000 for a beneficiary, you can elect to treat the contribution as made over a five calendar-year period. This allows you to utilize as much as $50,000 in annual exclusions to shelter a larger contribution. The money (and the growth of your account) gets out of your estate faster than if you made the contributions every year. There are more details to be discussed if this applies to you, but I�m sure you get the idea.

There�s more to know especially about the potential impact on financial aid qualifications and the sunset provisions inherent in this new tax law. If you are interested in discovering if a 529 plan makes sense for you or your family, please email or give the office a call.

Beverly Cox, IAR