In a knowledge-driven economy, education can have a profound and lasting impact on your career and income. The benefits of education are clear from the graph below, yet it can be hard to focus on those benefits when the path to get there requires years of serious saving. However, thanks to recent changes in several education savings programs, the incentives are greater than ever, and the tax benefits alone can help put a better education within reach for many.*

Based on those employed full-time aged 18 and over. Source: U.S. Census Bureau - Current Population Survey, 2000.

Custodial Accounts
Speaking of gift-tax exclusions, an often overlooked way to invest in a child or grandchild’s education is to bestow the money through the Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA). Starting in 2006, you can give up to $12,000 per year, per child, tax free. The child’s custodian controls the money until a designated age. However, the funds belong to the minor upon reaching the age of majority and may have tax implications that are not conducive to financing education.

Coverdell Education Savings Accounts
The Coverdell Education Savings Account provides another option. The limit per beneficiary rose to $2,000 from $500 starting in 2002. And unlike 529 Plans, Coverdell Education Savings Accounts can be used for both K-12 expenses and higher. These accounts also offer flexibility in terms of who can contribute, investment options from several sponsoring fund companies and the opportunity to change beneficiaries. Coverdell Education Savings Accounts also qualify for the annual $12,000 Gift Tax exclusion starting in 2006.

529 Prepaid Tuition Plans
If your students of tomorrow are likely to stay in-state, Section 529 Prepaid Tuition Plans may be the choice for you. You actually pre-pay tuition credits which can be used at eligible colleges or universities. This plan comes with many advantages, including:

• No federal income tax on qualified distributions
• Tuition cost locks
• No age limits
• Beneficiary transfer flexibility
• Gift-tax exclusion

The downside of the plan – if the student selects a private or out-of-state institution, you may not receive the full value of your credits, and you can only contribute cash to the account.

529 College Savings Plans
For those who are not sure what state they will be in, a different Section 529 option may be more appropriate. The 529 College Savings Plan allows you to pre-save rather than pre-pay. Your contributions to the plan may be withdrawn tax free (federal) if the proceeds are used to attend any accredited post-secondary school in the U.S.** Most plans allow low minimum and high maximum contributions, and let the donor maintain account control. Starting in 2006, special rules allow you to combine five consecutive annual gift-tax exclusions ($60,000 per beneficiary, $120,000 with gift splitting) to make a big, tax-advantaged contribution all at once, provided you do not make any other gifts to the recipient for five calendar years.

Seek Advice
When it comes time to buy into an education savings program, seek advice on each plan’s particulars. Indeed, each option comes with varying ramifications regarding investment options, estate planning, ownership issues, beneficiary transfers, early withdrawals, and income limits*. You will also want to consider your financial aid outlook — since these assets will likely affect your prospects. It is recommended that you work in conjunction with the financial aid office of the higher education institution the beneficiary may attend.

Start Saving
Although it is daunting to comprehend the costs of education, the more empowering approach is to focus on the value. Find a way to start saving as early as possible because the gains from appreciation alone can be substantial over time. Learning more about the newly improved, tax-advantaged savings plans are a great place to start. To find out more, call your financial representative.

* Tamarack does not provide tax or legal advice. Please consult your financial advisor or tax advisor to help create a plan tailored to your specific needs. Accelerated gifts are normally subject to an add-back feature in the event of death of the giftor.

** Participation in a 529 Plan does not guarantee the investment return on contributions, if any, will be adequate to cover future tuition and other higher education expenses. State programs vary, therefore, you should carefully review individual program documents before investing or sending money. Federal income tax and a 10% penalty on the earnings of distributions for non-qualified expenses may apply. State taxes may apply. Under a “Sunset Provision,” the federal income tax exemption is scheduled to expire on December 31, 2010, in the absence of reenactment of Section 529.