Now if you use withdrawals from it for college costs, earnings are tax-free.

Reviewed below are details of the 529 Savings Plan. For more information on tax-advantaged educational programs, go to www.taxfables.com and click on Other Planning.

Federal Taxes. Though contributions are not deductible, it has other advantages:

• Withdrawals for higher education including tuition, room, board, fees, books, supplies, equipment come out income tax free.
  
• The $11,000 annual per donee gift tax exclusion is available. Moreover, you can accelerate future annual exclusions up to five years. So a married couple can contribute $110,000 with no gift tax consequences.
  
• The 529 is available no matter how high your income.
  

State's Role. Essentially this is a state-sponsored mutual fund. Each state has a different program with a mix of rules concerning fees, tax benefits, maximum contributions and investment options. You can usually select among investment strategies, with portfolios often managed by recognized financial institutions.

To find out what's available in the different states, call the National Association of State Treasurers at 877-277-6496 or visit www.collegesavings.org or www.savingforcollege.com

Flexible. You control the account: You can revoke it. You can select a nonrelative as the beneficiary. You can choose any state plan no matter where you live or where the beneficiary plans to attend school. And you can change the beneficiary with no income or gift tax consequences if the new beneficiary is a relative and in the same generation as the original beneficiary. Relatives include grandchildren, nieces, spouse and some in-laws but not cousins. A change in generation level, like a son replacing his father, results in a gift tax.

Most post secondary educational institutions including vocational schools are eligible.

Downside. Remember these points:

• If you withdraw funds for a nonqualified use, you will owe income taxes on earnings and a penalty of usually 10 percent.
  
• The fund may reduce the student's eligibility for financial aid.
• Like mutual funds, the contributor doesn't select the stocks or bonds; the state or fund manager does. The contributor selects among packages available in the state, but if all are unsatisfactory, the contributor can invest in another state's program. But then, he may lose some state-resident tax advantages, such as the state gift tax exemption. Further, because this is a new program, states have little investment track record, so how well they will do is speculative.(more at Other Planning)
  

Released 3-25-02