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Looking for a Tax-Efficient Way to Save For
Your Child's College Education?
If you have young children, you have probably
already tried to get a sense of the projected cost of a college
education for the year that your child will turn 18. Once the sticker
shock wears off, you probably realized the following:
You need to begin saving for your child's college
education as early as possible.
Unless you set aside a certain amount of money on
a monthly basis, you won't have nearly enough money saved when it's
time to pay for your child's college education.
You will have the best chance of meeting your
savings goal by segregating the money earmarked for college from your
other savings accounts.
Education IRAs Offer TAX-FREE Growth
Parents of children who have not yet attended
college are entitled to have $500 per year contributed to an
Education IRA on behalf of each of their children. Amounts
contributed will grow TAX-FREE as long as the distributions from the
Education IRA are used to pay for qualified post-secondary education
expenses; which includes tuition, fees, and required books.
Income Limitation: Unfortunately, high
income taxpayers will not be eligible to contribute to Educations
IRAs. No contributions are allowed by single taxpayers whose adjusted
gross income (AGI) exceeds $110,000 and married couples whose AGI
exceeds $160,000. Partial contributions are allowed for single
taxpayers whose AGI exceeds $95,000 and for married couples whose AGI
Planning Opportunity: Amounts contributed
into an Education IRA do not need to be made by the child's parents.
If your income exceeds the threshold indicated above, you may want to
ask somebody else, such as a grandparent, aunt or uncle, or friend,
to contribute $500 into an education IRA on behalf of each of your children.
Don't Overlook the New "529" Plans
Recently, a new type of college saving
opportunity became available. These programs, known as 529 Plans, are
sponsored by individual states. The Massachusetts program is
administered by Fidelity Investments and is called the U.Fund, the
New York program is administered by TIAA-CREF and is called New
York's College Savings Program, the Maine program is administered by
Merrill Lynch, and the New Hampshire program is called the Unique
Plan and is also administered by Fidelity. These programs all offer
the following benefits:
Unlike Education IRAs, there is no income
limitation in connection with these college savings plans.
These plans allows an annual contribution of up
to $50,000 per child. If you contribute $50,000 in one year, however,
you need to wait at least five years before making additional
contributions to the plan.
The money invested grows tax-deferred.
When distributions are made from the plan to pay
for the child's education, the earnings are subject to income taxes
at the child's tax rate, who will generally be in the lowest tax bracket.
If you pay taxes to New York State, up to $10,000
per year contributed to the New York's College Savings Program is tax
deductible and grows tax-free for state purposes. Other states may
follow New York's lead and allow for the contributions made into the
college savings plan to be state tax deductible.
There is a downside to these college savings
programs. The first is that the amount of financial aid that you will
be eligible for might be impacted. The second is that you have no
control over how the money is invested. You need to determine whether
Fidelity, TIAA-CREF, or Merrill Lynch will be investing your child's
college money aggressively enough for you. Thirdly, contributions
cannot be made to an Education IRA and a 529 Plan on behalf of any
one child in the same year.
High income taxpayers should not overlook these
plans as a way to save for a child's education. For more information
on Fidelity's U.Fund, call (800) 544-2776 and on the New York's
College Savings Program, call 1-877-NY-SAVES.
TO DO LIST FOR APRIL, 2000
Saving and Investing
Personal income tax returns are due 4/17/00
Request for automatic extension, Form 4868, due 4/17/00
1st Quarter estimates due 4/17/00
Due date for funding your 1999 Roth or Traditional IRA
Due date for self-employed individuals to fund their
retirement plans is 4/17/00
Self-employed individuals who need additional time to
fund a retirement plan should file a Form 4868 with the IRS
1999 & 2000 TAX FACTS
For 1999, the standard deduction for a single individual is $4,300
and for a married couple is $7,200. A person will benefit by
itemizing once allowable deductions exceed the applicable standard
deduction. Itemized deductions include state and local income taxes,
real estate taxes, mortgage interest, charitable contributions, and
unreimbursed employee business expenses.
- For 1999, the personal exemption is $2,750. Individuals
will claim a personal deduction for themselves, their spouse, and
- The maximum earnings subject to social security taxes
has been increased to $76,200 in 2000 from $72,600 in 1999.
- The standard mileage rate has been reduced to $.31
per mile as of April 1, 1999 from $.325 per mile previously.
- The maximum annual contribution to a 401(k) plan or
a 403(b) plan has been increased to $10,500 in 2000 from
$10,000 for 1999.
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