Monday, September 06, 1999


An ideal way to save for college

        Question: I've heard I can save both income taxes and gift taxes if I use a “Section 529 College Savings Plan” for my kids. How do these plans work? Are they a good idea?

        Answer: Paul Caron, associate dean for faculty research and Charles Hartsock Professor of Law at the University of Cincinnati College of Law, says Section 529 plans are an ideal way to save for college. There are two types of Section 529 plans: prepaid tuition programs and college savings plans.

        Prepaid tuition programs like Ohio's allow you to prepay tuition using today's dollars, guaranteeing that your investment keeps pace with the rate of educational inflation. Unlike programs in other states, Ohio's allows you to use prepaid tuition credits at any public or private college. For more information, see

        College savings plans like Indiana's allow you to invest for college through mutual funds selected by the state, thus tapping the potentially greater returns available through the stock market. For more information, see

        Kentucky's savings plan, which is currently heavily weighted toward bonds, is ex pected to be expanded later in the fall to include more exposure to the stock market. Call (800) 338-0318 for more information.

        Prepaid tuition programs and college savings plans offer several tax advantages. Federal income taxes are deferred until funds are distributed, and the tax is paid at the student's rate, typically much lower than the guardian's. The recent tax bill approved by Congress and awaiting President Clinton's signature would permanently exclude this appreciation from tax. Up to $50,000 can be invested in any one year free of gift tax.

        The choice between a prepaid tuition program and a college savings plan depends on several factors. Do you prefer the certainty of having your investment rise with educational inflation, or the opportunity to earn stock market returns?

        For help in deciding, check out the national Web site for Section 529 plans:

        — Compiled by Amy Higgins Readers should consider the advice from the Money Panel as general information only. Investors should seek the help of professionals on questions regarding their own portfolios because circumstances might vary.


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