IRA Education And Tax AdvantagesShop around start by asking your current broker or banker about the account, and see if you can get Ira education fee-free or with reduced fees. Strickland said you also need to shop around for a mutual fund that will accept $500 a year as a starting contribution. "When the accounts first came out, there weren't a lot of fund families sponsoring them," he said. "We're seeing many more families offer the accounts now, but only for one or two funds within that family. That means you need to choose carefully, because it's tough to build up a really diverse portfolio with just $500 a year." Any money must be used before the child turns 30 years old, Ghezzi said. However, a child can transfer the funds to any other family member, including other siblings and parents. You also need to be aware that using other federal programs to pay for college could affect your ability to take tax-free income from the account, Ghezzi said. For example, if you use the Hope credit to exclude up to $1,500 in tuition costs from your income, you can't also take a tax-free withdrawal from the educational IRA. "But I really think you can plan for that," she said. "And if you have 15 years to save for your child's education, the chances of the tax law being the same in 15 years are pretty slim. So I'd be inclined to say go for the tax-free income and worry about the rest when the time comes." The savings plan New York State is on the cusp of offering College Choice Tuition Savings Accounts. Families will be able to stash up to $5,000 a year per child. You can contribute a maximum $100,000 for each child. The account offers families a tax advantage: no state taxes at all on withdrawals if the money is kept in the account for at least three years and is used for qualified education expenses, such as tuition or room and board. Federal taxes on investment earnings don't have to be paid until the money gets withdrawn, so it grows tax-free. Those tax earnings are the difference between a College Choice Tuition Savings Account and a plain-old savings vehicle, said New York Comptroller H. Carl McCall. "Since the funds are withdrawn by students, who often have little or no income, the federal tax rate will be very low," McCall said. "Students could find themselves in a low enough income bracket that they could end up owing no federal tax at all." Students don't have to use the money at a New York state college, and McCall said the account balances will not be used in figuring out New York state student-financial aid - but other financial aid programs may take the account balances into consideration in determining awards. The federal law that authorizes such accounts prohibits offering account holders investment choices, McCall said. That means deposits to College Choice Tuition Savings Accounts will be pooled, and managed by TIAA, a New York-based, not-for-profit financial services organization. McCall's office and the Higher Education Services Corp. will oversee the management. |