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Qualified State Tuition Programs may be the key to saving for your child's college education.

Three methods for saving for your child's college education can be custodial accounts, education IRAs or section 529 college savings plans. Custodial accounts are taxed currently and revert to ownership of the child upon majority age. The first $700 of earnings are tax-free. The next $700 of earnings are

taxed at the child's rate. Annual earnings above $1,400 are taxed at the parent's highest marginal tax rate for children under 14 and at the child's rate for children age 14 and older.

Education Savings Accounts, or Education IRAs, allow nondeductible contributions, or gifts, to be placed in an account for a named beneficiary. Contributions are limited to $500 per child per year. Earnings are tax-exempt as long as withdrawn funds are used toward higher education expenses. Funds must be used by the beneficiary's 30th birthday.

Distributions not used for higher education expenses are subject to ordinary income taxes and a 10 percent penalty.

Congress' third try might be the charm. In 1997, Congress broadened Section 529 of the Internal Revenue Code relating to Qualified State Tuition Programs (QSTPs). Provisions allow contributions ranging from $25 to over $100,000. Many states limit cumulative contributions to approximately $160,000 indexed for inflation. Contributions must be made in cash; however, donors may contribute $50,000 in any single year without triggering gift taxes. Under normal circumstances, these contributions are excludable from the donor's estate. Money contributed to section 529 plans grows tax-deferred until withdrawn. Qualified withdrawals are taxed at the student's rate.

With QSTPs, the account owner maintains control over use of the funds. There are virtually no age, income or time limits! Funds do not have to be used by age 30. Parents not qualifying for Education IRAs because of earned income limitations may contribute to section 529 plans. If the original beneficiary does not pursue higher education, the beneficiary may be changed to a broadly defined family member. Finally, the account owner may even choose to become beneficiary and use remaining funds for educational pursuits during retirement.

Scott Butera is a Financial Consultant with Salomon Smith Barney. Salomon Smith Barney does not provide tax or legal advice. Please consult your tax or legal advisor.

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Title Annotation:Qualified State Tuition Programs
Comment:COLLEGE SAVINGS... WITHOUT LIMITS!(Qualified State Tuition Programs)
Publication:Hawaii Business
Article Type:Brief Article
Geographic Code:1U9HI
Date:May 1, 2001
Next Article:Room @ the top: KITTY LAGARETA.

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