Money for Grandkids college

Q. I heard there is some way we can put aside money for our grandchildren's college education that also acts as a great tax write-off for us now. Have you heard of this?

The government has provided tax incentives for a number of different educational savings programs in recent years. Taking advantage of these tax incentives can literally save you thousands of dollars.

The Hope Credit and Lifetime Learning Credit are very popular. They provide a tax credit that may directly reduce your federal income tax liability.

But you are referring to a savings program. The federal government's tax incentives in this area is generally limited to either delaying taxation of income until the funds are withdrawn from the investment, or by making withdrawals tax-free.

An example of the first incentive is the use of a regular IRA to fund educational costs. Earnings within the IRA are not taxed until the funds are withdrawn.

An example of the second type of incentive program is an Educational Savings Account (ESA) (formerly known as a Education IRA). Distributions from an ESA are generally tax-free to the extent that the funds are used to pay education expenses.

What you have probably heard about are the Section 529 savings plans.

These plans are a great way for parents and grandparents to save for college. Earnings from such accounts used for qualifying expenditures are federal tax-free and generally are also state tax-free.

Many states also provide tax deductions or credits for contributions into such plans. For example, Ohio allows taxpayers to deduct contributions into Ohio 529 accounts up to $2,000 per child per year.

Choosing the best means to fund educational costs can be very confusing. Not only do you have differing investment options, but available tax incentives also vary both by how the funds are accumulated and your individual income tax situation.

The tax incentives often phase-out based upon the taxpayers level of adjusted gross income (AGI). Finally, how you fund college costs may affect the student's financial aid.