Saving for child's education could also have tax benefits


November 21, 1999|By Diana McCabe | Diana McCabe,ORANGE COUNTY REGISTER

My father-in-law is coming into a lot of money from selling stocks and would like to put it away for his grandchildren for educational purposes. He would like to receive a tax benefit, too. What are some strategies he should consider?

You have several options for socking away education funds for grandchildren, says Glenn Woody of Financial Consultants Inc. The subject is far too involved and technical to treat exhaustively in this column, but Woody offers a few ideas to get you started:

Uniform Gift To Minors Act Account: You can make a gift of any amount to such an account, which is established in the name of a minor with an adult as custodian. There is no particular tax advantage, but the money is taxed at the child's lower tax rate after age 14. Before then, taxes are imposed at the parent's tax bracket.

One major disadvantage: The gift is irrevocable. The beneficiary has full legal access to the funds when he or she turns 18 and may use the money for any purpose.

Education IRA: Unlike a retirement IRA, an education IRA is a trust or custodial account created for paying eligible higher-education expenses of the designated beneficiary of the account.

You can contribute up to $500 per year per child under age 18. Contributions to an education IRA are not deductible. But the money grows tax-deferred, and distributions are tax-free if used for the beneficiary's qualified higher-education expenses in the year of the withdrawal.

The $500 maximum contribution per child is gradually reduced if the contributor's income exceeds certain levels. For some people, the $500 limit severely restricts these accounts' usefulness.

Qualified State Tuition Programs: These are also called QSTPs or Section 529 Plans. 529 Plans are state-sponsored investment programs with special tax status under Section 529 of the Internal Revenue Service Code.

The 529 Plans have many potential benefits. Among them: Earnings are tax-deferred until distributed and taxed to the beneficiary at distribution, usually at the student's lower tax bracket; funding is treated as a completed gift, so funds come out of the donor's taxable estate. These plans can be used by those with high incomes.

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