Sunday, August 23, 1998

Q   We qualify to invest in an education IRA for our 3-year-old son. Is this a good way to help save for college?

A   Yes, this is one of the many strategies that can be used to help meet your child's college costs. However, at a $500-per-year contribution limit, the Education IRA alone will not be enough. You will want to use as many saving strategies and tax breaks as possible such as the Roth IRA, the Hope Scholarship Credit, the Lifetime Learning Credit and other investment plans. When your child begins school you will want to carefully plan how and when you use each of the tools and strategies available to you.

Some important points to remember:

• Watch out if you also are contributing to a qualified state prepaid tuition program and an education IRA. Contributing to both in the same year for the same student can result in an excess contribution to the Education IRA. This will generate a tax penalty and a headache.
• Since claiming an exclusion for educational expenses for an IRA withdrawal negates the ability to take the Hope or Lifetime Learning Credit for the same student, care should be taken to determine which strategy is best. If you qualify for the Hope Credit during the first two two years of the student's education, you may not want to use your Education IRA until the third year.
• Any excess amounts left in your education IRA may be rolled over to another family member to avoid the penalty for saving too much in the Education IRA.

Terry W. Nelson, CFP^TM MS      Hometown Financial Planning, Roseville    (651) 638-9428