The ever-rising cost of higher education has many parents wondering, How will I afford to send my children to college, and what is the best way to save for this important goal? If you have begun to explore education funding possibilities, you have probably found that there is a downside to many traditional savings plans.

For example, if you would like to put the funds for your child¹s education into a custodial account, you are making an irrevocable gift to your child and giving up control of the money in that account.

Education-specific savings alternatives, such as the Education IRA, do provide tax-free distributions for education expenses. However, parents with relatively high incomes may not be allowed to contribute to these accounts, and those who are able to contribute are limited to $500 annually.

Congress has heard the concerns of parents dissatisfied with these conventional savings plans and has passed legislation that gives states the authority to establish Section 529 College Savings Plans. These programs allow individuals to contribute substantially more money toward higher-education expenses while reaping significant tax benefits. Since these savings plans typically have no income restrictions and allow for relatively large contributions that can exceed six figures, they can be the answer to the education funding concerns of many middle and upper income families.

The assets in a College Savings Plan grow tax-deferred, meaning that any dividends and realized capital gains are not taxed annually. This feature will allow the account to grow larger than an identical taxable account where earnings are taxed every year. The earnings on distributions used for qualified educational expenses, which include tuition, fees, room and board expenses, and supplies and equipment, are taxable upon withdrawal at the student¹s rate. Since most children do not have earned income, the federal tax rate is usually 15%.

Coming up Next:
Come back for College Savings Plans Part II.

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.

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