From the November 2001 issue of Entrepreneur

Saving for college is getting more attractive from a tax standpoint, thanks to the new tax law's changes in Section 529 plans. Starting in 2002, distributions to students are exempt from federal tax as long as they're used for higher education.

Operated by states and managed by large brokerage houses, the plans came into use in 1997. Money accumulated can be used for qualified higher-education expenses such as tuition, fees, books and equipment.

Be sure to check out how your state taxes 529 plans. Some give deductions for contributions made by their residents, and some exempt state tax on the distributions. Keep in mind you can also invest in 529 plans in states other than your own.

Starting next year, taxpayers can shift from one state plan to another for the same beneficiary once in a 12-month period. Under old law, you could switch only for another family member, says Brent Lipschultz, senior manager in KPMG's personal financing planning practice in New York City.

As long as the state allows it, it may be possible for you and your spouse to put $100,000 into a Section 529 plan in one year and pay no gift tax. Federal law permits a married couple to use five years of gift tax exemption in one year for these plans.

To obtain details on Section 529 plans by state, go to www.collegesavings.org.


Great Falls, Virginia, writer Joan Szabo has reported on tax issues for more than 14 years.

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