New rules for IRAs help Americans save for college

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On Jan. 1, a new federal law makes significant changes in the way Amer-icans can save for both retirement and college. Major features of the law in-clude better tax benefits and larger contributions to all types of individual retirement accounts. The legislation also is designed to make state-sponsored college savings plans more attractive to ave-rage families.|ret||ret||tab|

One of the key provisions of the law affects contributions to education IRAs. |ret||ret||tab|

Until this year, families were allowed to contribute a modest $500 per year for every child under the age of 18 to an education IRA. |ret||ret||tab|

The money could then be withdrawn when the child entered college, and could be used, tax-free, for school related expenses including tuition, fees, books, equipment and room and board.|ret||ret||tab|

Unfortunately, the low limits meant that even if you started contributions on your child's first birthday and continued the maximum contribution until your child graduated from high school, you would have less than $10,000 as a base amount, plus any accumulated interest to use for your child's education financing.|ret||ret||tab|

In many cases, those funds ran out after the first year or two due to the escalating tuition costs of many colleges and universities.|ret||ret||tab|

The new rules for education IRAs ex-pand contribution limits significantly, allowing a maximum contribution of up to $2,000 per child per year. |ret||ret||tab|

This means that an education IRA could be worth more than $40,000 by the time a student starts college and all that money can be withdrawn tax-free for legitimate school expenses. |ret||ret||tab|

In fact, the new law broadens the definition of "qualified education expenses" to now include elementary and secondary school costs, as well as college and post-secondary training expenses.|ret||ret||tab|

Taxpayers also may claim Hope or Lifetime Learning Tax Credits in the same year they take distributions from their education IRAs, as long as the funds are used for different expenses. This is a significant change from past regulations. |ret||ret||tab|

There are income limits and phase-outs associated with the education IRA, but they have been increased significantly to allow greater participation in the program. |ret||ret||tab|

Another option for college savings is a program known as the 529 account. Basically, these are state-run college savings plans that are open to all families, regardless of income. Versions of the 529 program exist in 43 states and they allow a broad range of contribution levels from as little as $25 to as much as an account balance of $225,000. The account owner may deduct up to $8,000 per year (or $16,000 for couples who file taxes jointly) from his Missouri state taxes. |ret||ret||tab|

Missouri's version of the 529 account is known as the MOST Missourians Saving for Tuition Program. Money invested in the MOST Program remains under the control of the person who creates the account until the child goes to college. These funds, which are in turn invested in stock and bond funds, continue to grow tax-free for the life of the account. Under the old rules, withdrawals from the account were subject to federal tax at the student's tax rate (usually 15 percent). |ret||ret||tab|

But, as of Jan. 1, withdrawals from 529 accounts will be completely free of federal and state taxes as long as the funds are used for allowed student expenses. And even though the 529 accounts are state-sponsored, the money is portable and can be used at any school in the country.|ret||ret||tab|

There's one other important thing you should know about 529 accounts. Be-cause you retain control of the funds un-til your child goes to college, these funds will count as parents' assets in terms of qualifying for financial aid.|ret||ret||tab|

Before you invest your money in a college savings plan of any sort, it may be to your advantage to consult with a certified financial planner or your accountant. Those professionals can help you craft a savings strategy that fits your individual financial needs.|ret||ret||tab|

(John Bailey is the director of education finance for SmartFunds, a division of Central Bancompany, which administers a student loan program for 13 Missouri banks, including Em-pire Bank in Springfield. [[In-content Ad]]