Newsletter for August 2002

If all the back-to-school sales have made you wonder about how to save for college tuition and ESAs and 529s are as familiar to you as high school algebra, this month's Featured Question is for you. Of course, you still have to save for retirement too, so the Article Briefings highlight concerns over the ability for many to have a comfortable retirement, action the government is taking to support long-term care insurance, some ideas about balancing one's 401(k), and strategies for rebuilding lost retirement savings. Don't miss the Resource Link, which leads you to more information about saving for education, including connections to plans offered by various states.

Featured Question of the Month
Investment and Savings Options for Education Expenses

Article Briefings
Cracks in the System
Sowing the Seeds for Long-Term Care Insurance
Gluttons for Punishment
Repairing a Wrecked Retirement

Resource Link
College Savings

Q: Like many people, I need to make my savings grow for both my retirement and my child's education expenses. What kinds of savings or investment vehicles can I use to increase my education savings?

A: It's important to work with a financial advisor who can examine your particular situation and help you find the most productive way to balance your savings for both retirement and education expenses. However, there are two useful savings vehicles that you should be sure to discuss with your advisor: Coverdell Education Savings Accounts (formerly and still commonly called Education IRAs) and 529 plans (named for Internal Revenue Code Section 529).

A Coverdell Education Savings Account (ESA) is a tax-sheltered account, opened on behalf of a child that is under age 18. As of 2002, you may contribute up to $2,000 each year to your account (up from $500 in previous years), with a contribution deadline of April 15 of the following calendar year. Your ESA advisor will help you to increase your account by investing your contributions in various ways. Your contributions are not tax deductible, but the withdrawals are tax-free if used for qualified expenses. Qualified expenses include many costs of an elementary, secondary, or college education (such as tuition, fees, tutoring, books, supplies, room and board, transportation, special needs, a computer system, educational software, and Internet access). Eligibility limits do apply. Your ability to participate in an ESA will be phased out for an adjusted gross income of $190,000 to $220,000 for joint filers and $95,000 and $110,000 for single filers. If you plan to use an ESA to fund a child's college expenses, be sure to consult with an advisor first. ESAs are more likely to benefit higher-income families with children who probably won't be eligible for financial aid. Lower- to middle- income families may lose more financial aid than they will save in taxes, because ESAs (which must be opened in the child's name) are counted as the child's assets and will likely reduce the amount of aid that he or she can obtain.

529 plans are state-sponsored accounts that support college education expenses and enjoy tax benefits at both the state and federal level. 529 plans come in two forms: a prepaid tuition plan and a savings plan. States may offer one or both plans. In a prepaid tuition plan, you purchase a chosen amount of tuition (in years or other units) at today's rates, by making either monthly installments or a one-time lump payment. The state will then pay for that same amount of future tuition at any of the state's participating colleges or universities. (Or, it may pay an equal amount for tuition at private and out-of-state institutions.) The savings plan offers a variable rate of return on the money you invest, with some states guaranteeing a minimum rate of return. All earnings are exempt from federal taxes. Tax benefits at the state level vary. Many states offer full or partial tax deductions for your contributions and full exemptions for your earnings.

The basic differences between ESAs and 529 plans are that ESAs are self-directed, so you decide where to purchase the ESA and who you will work with to help you invest your money. A 529 plan is more like a savings account, where the state takes the money and does the investing for you. ESAs generally have no state tax benefits, but some states may offer tax benefits for 529 plans. Also, ESAs can be used for primary and secondary education, but 529 plans are for higher education only. Finally, ESA funds may affect your child's eligibility for financial aid. As always, consult with your financial advisor to help you decide what is right for you and make the most of your savings dollars.

*NOTE: Some Internet email programs do not maintain links to extended web addresses. If you would like to read the full abstract, and the links below do not work for you, try copying the entire link and pasting it into the address window in your Browser.

Cracks in the System
New research from New York University economics professor Edward N. Wolff reveals that the retirement income of the typical baby boomer fell 11 percent from 1989 to 1998, even as the stock market made remarkable gains...

Read the full abstract at:

Sowing the Seeds for Long-Term Care Insurance
Experts say the launch of the federal government's new long-term care insurance program for federal employees and retirees could provide a boost for the private long-term care insurance market, and will help educate the nation about its benefits....

Read the full abstract at:

Gluttons for Punishment - 401(k) holders
According to Boston Research Group, about 30 percent of 401(k) assets are in employer stock, and about 50 percent of those interviewed consider that stock riskier than money market funds. P> Read the full abstract at:

Repairing a Wrecked Retirement
The declining stock market has stripped $678 billion from investor's portfolios, but advisors say Americans can rebuild their nest eggs.

Read the full abstract at:

College Savings Plans Network

All fifty states and the District of Columbia now offer 529 plans as a tool for college savings. This web site is a convenient way to brush up the basics and link to sites that detail your state-specific plan. The FAQ section spells out the difference between prepaid plans and savings plans, as well as an overview of tax benefits, use guidelines, and the relationship of 529 plans to Education IRAs. Also, an "In the News" section provides numerous media commentaries on 529 plans, with links to the full articles.


(c) 2001 Copyright Claimed, Internet Retirement Alliance.

Abstracts (c) Information, Inc., Bethesda, Maryland 301-215-4688. Redistribution is prohibited.

The material and information herein is obtained by from a wide variety of sources. The Internet Retirement Alliance ( believes this information is accurate, current, and authoritative, but it may not be. The Internet Retirement Alliance ( provides the information "as is" without any express or implied warranties.

The Internet Retirement Alliance ( does not provide legal, accounting, investment, or other professional services. If the reader requires legal, accounting, investment, or other expert assistance, the services of a competent professional person should be sought.

Back   | Home   |  Newsletter Archive