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Tax Bill Eases College Savings
By Bruce Mushial

One of the largest expenses a family will face is paying for a child's college education. If you have a number of children the expense can add up. The good news is there are many ways to plan for this expense and the new tax bill just signed into law contains some features that make the whole task easier. For a recent newborn, the expense of attending a top tier college or university for four years will be over $200,000 by the time they reach college age. In addition to the usual scholarships and student loans there are a few ways of saving for a college education that are relatively new. Most states now have Section 529 college-savings plans. These professionally managed accounts allow funds to grow tax-free. If you saved $3,000 per year from when a child was 3 years old and earned a conservative 8 percent per year, the account balance would be $81,500 when the child reached 18. Under the previous plan you could then withdraw the funds at the child's lower tax rate. Unfortunately if you withdrew the funds at a rate of $20,000 per year for 4 years, you would still lose $3,000 per year to taxes assuming the child was in the 15 percent tax bracket. The $12,000 paid in taxes would certainly have paid for a lot of books and other expenses. The good news is under the terms of the new tax bill the Section 529 withdrawals will be 100% tax free if used for educational purposes. If you withdraw the funds for non-educational purposes you are still subject to a 10 percent tax penalty. Under the new guidelines, if the beneficiary of the account decides not to go to college the account beneficiary can be shifted to another family member, extending as far as a first cousin. Many people haven't used the new Educational IRA Accounts for the simple reason contributions are limited to just $500 per year. Even if contributions are begun at birth, it is still difficult to amass an amount that will pay for college expenses by the time the child reaches age 18. But, beginning next year the annual limit on the Educational IRA accounts will be raised to $2,000 per year, allowing a much larger amount to be accumulated by age 18. The new tax bill allows for a tax deduction of up to $4,000 per year for college tuition and the deduction is available to a taxpayer even if they don't itemize their deductions. The new tax bill will allow a deduction of $3,000 in both 2002 and 2003. In 2004 and 2005 the deduction will be $4,000, and the deduction will end in 2005. Students can still deduct up to $2,500 per year in interest on student loans. Under the new law students aren't limited to a 5-year maximum period in which they can take the deduction, which is good news since many students are taking up to 10 years to pay off their loans.