Married With Children

Taking advantage of two incomes makes raising a family much easier

can be deferred and even avoided in certain circumstances.

Through 2001, Education IRAs permit you to invest a maximum of $500 per child, per year, which won’t make much of a dent in college bills. Next year, however, that limit goes up to $2,000 per year, which will make them more attractive. Investment earnings are untaxed while inside an education IRA and also when they’re withdrawn to pay school bills.

“Even though education IRAs were helped by the new law, Section 529 plans were helped even more,” says Darrell Oliver’s advisor, Earl Romero, an accountant and financial planner affiliated with H.D. Vest Financial Services in New York. “They’ll go from low-tax to tax-free plans next year.”

Section 529 plans (named after a portion of the tax code) are offered by most states. “You can put much more into these plans than into Education IRAs,” says Romero. “Also known as qualified tuition plans, the rules vary by state, but some allow you to contribute more than $10,000 per year per student or up to $50,000 maximum every five years, whichever comes first.”

The Section 529 plans can be especially appealing for upper-income parents (see “What the New Tax Law Means to You,” this issue). “You have more control with a Section 529 plan than with an education IRA,” says Romero. “Section 529 plans let you keep money in the account until a child is age 30. If the child doesn’t spend the money for college, you can roll the account into the name of a related individual, tax-free.” Thus, if your son John turns out to have no interest in higher education, you can simply transfer his Section 529 account to your newborn granddaughter Jean for ongoing tax-deferred buildup.

Under prior law, investment earnings withdrawn from a student’s Section 529 plan for college would be taxed at the child’s presumably low rate. “The 2001 tax law turned a great deal into an incredible deal,” says Peace. “Starting in 2002, withdrawals are all tax-free if they’re used for higher education.”

Some Section 529 plans offer further state and local tax breaks to residents, so it’s probably worth looking at your home state’s plan. Many state plans are open to non residents, so they may be more appealing. “Colorado offers state tax breaks, but they’re relatively small,” says Peace. “In the long-term, I’d rather recommend plans from Michigan and Rhode Island, which seem to be better managed.”

Indeed, Colorado resident Michael Wilson says that he’s about to fund a Section 529 plan for his young son; Peace is recommending the Rhode Island plan, where the money will be managed by Alliance Capital, one of the largest institutional investors in the country. “Long-term, it’s likely that superior performance will outweigh the lost state tax breaks,” says Peace.

Even though a parent’s financial concerns revolve around their children, you should be investing for yourself, too. The Wilsons, who have a retirement nest egg of approximately $100,000, are well on their way. “We have a plan that calls for us to retire

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