Saving for College:
Education IRA: Parents or other relatives or friends can deposit a maximum of $500 per year per child in this new account. The earnings are tax-free, but an account receiving maximum deposits over 18 years will grow to only $25,000, only a fraction of total college costs. "The Education IRA is definitely worth doing," says Steve Norwitz. "But it's not going to make a big dent in your problem."
Penalty-free IRA: Parents can now withdraw money from an IRA for college expenses without paying a 10 percent penalty for early withdrawals (although earnings are taxed).
UGMAs and UTMAs: The Uniform
Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors
Act (UTMA) enable parents, grandparents, or other adults to save
money in a child's name. The advantage is that for children under
14, the first $700 of the child's earnings is tax-free and the
next $700 is taxed at the child's rate (usually 15 percent). Once
a child reaches 14, this "kiddie tax" rate generally applies.
Hope Scholarship and Lifetime Learning Credit: Applies to single parents earning a maximum of $50,000 and couples earning a maximum of $100,000. These families can receive a tax credit equivalent to $1,500 per year for each of the first two years their children are in college, and $1,000 thereafter.
Prepaid tuition plans: Maryland and several other states now have these plans, which allow parents and other people to buy shares that earn interest and are then redeemable for tuition at eligible colleges within the state. The shares are purchased at a discount.
RETURN TO SEPTEMBER 1998 TABLE OF CONTENTS.