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SAVING FOR BABY FROM CRADLE TO COLLEGE

By Teresa Gallagher

As summer rolls to an end each August, I grow increasingly reminiscent of the great anticipation and excitement in reuniting with friends on my own college campus. A decade later, as I stare down the store aisle searching for any remaining BarbieŽ backpacks for my own daughter, I wonder when, exactly, I transformed from a carefree & self indulgent 21 year old into a real live adult. As most moms will attest, it is exactly at the moment of her 1st child's birth that this transformation occurs. Suddenly there exists a person whose welfare and future relies upon your every action and decision. Among the worries and concerns inherent with this responsibility, is the tremendous burden of planning for a college education.

As they say, with knowledge comes power, so I began educating myself on this issue. I found myself staring at some startling statistics. The average cost for a 4-year private college for tuition, room and board is nearly $100,000 - with analysts predicting by 2020 a bill that could reach $260,000!1These overwhelming figures have contributed to the increasing pressure and financial burden for young parents like myself trying to plan for a child's future. With all the 'buzz' surrounding this new '529 Savings Plan', I decided to do a little research of my own in the hopes of surmounting this college challenge.

529 Plans are one of the most popular new investment vehicles out there to assist in college savings. Some are calling them the 'wave of the future' - offering a tax deferred college investment plan for families. Named after Section 529 of the tax code, these plans are offered and operated by individual states. It's up to each state to decide whether it will offer the 529 Plan and how it will be structured. The plan works somewhat like a retirement account - you can contribute the maximum amount set by the plan and, as long as you keep the money in the plan, your contributions grow tax free until withdrawn. Additionally, the new tax law allows qualified distributions from a 529 Plan to be federal (and generally state) income tax free starting in 2002.

THE GOOD:

Income Tax Breaks
Your contributions grow tax-free as long as your money stays in the plan. Currently, upon qualified withdrawal (qualified withdrawals can be used for expenses as tuition, room, board, and supplies) the earnings are taxed to the student - which would, in most cases, be taxed at a lower income tax rate. Again, with the new tax laws, in 2002, these withdrawals will be federal income tax free (and generally state income tax free too). Unqualified withdrawals will be treated as ordinary income and will be subject to penalty.

Maintain Control
You can set up a 529 Plan for anybody and can generally change the beneficiaries at any time. This gives you the control for the surprises life (and children) always holds! Barring a few exceptions, the named beneficiary has no rights to the funds. You are in control of the amount, the purpose and timing of withdrawals.

Contribution Allowances and No Income Limits
529 plans differ from traditional education IRAs, as they have no income limits, allowing all to join. While contribution allowances vary from state to state, you can generally make a one-time contribution of up to $50,000 ($100,000 for a couple filing jointly) in one year without triggering a gift tax provided no additional gifts are made to the beneficiary for a 5-year period.

Choice of Investment
Currently, you can choose from different investment options offered by the particular state's plan, including a choice of mutual funds. The investment of the account is managed by the state sponsoring the plan. Since these plans demand administration and professional management, most states choose financial firms to handle their plans.

As with any investment, experts suggest researching your investment options in the plan. No two plans are alike, with differences ranging from investment options, to costs, to tax advantages. It's up to you to determine, based on your circumstances and goals, the best plan. Additionally, some experts suggest starting with your own state's plan as each state can have specific options that allow more advantages for in state residents.

THE BAD:

As with all financial planning tools, these plans also have their own drawbacks. Some of the bigger considerations are:

  • These plans are relatively new and the variety of investment plans is limited right now.
  • Once you invest money in a fund, it's not that easy to transfer it.
  • Investment in the plan may negatively affect your ability to get financial aid - the 529 Plan is an asset of the parent until the time of withdrawal, when it becomes the income of the child, which is a consideration in figuring financial aid.

If you are interested in receiving more free information on one of the Plan's, and an application, visit Anna Cris Maternity's Free Offers (may not be available), and select the offer for the CollegeBoundfund.SM

Overall, I believe this plan is worth a good look. With all the confusing and often conflicting information available, it is always more comforting to be armed with the 'know how' to face the daunting challenge of preparing for your child's higher education. Although it may seem like a lifetime away, it really will be in the blink of an eye, that your children will go from Cradle to College.

Information stated here should not be construed as financial advice. Please consult a professional advisor before investing.

1Source: Annual Survey of Colleges. 'Trends in the Costs of Higher Education'.

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