With the cost of tuition and fees at a four-year private college now averaging over $18,000 for the 2002-2003 academic year*, it is prudent to start saving as early as possible for the higher education costs of your children or grand- children. There are several options specifically designed for education funding available to you.

529 College Savings Plans

Sponsored by most states, 529 college savings plans may be funded with after-tax contributions (depending on the state(s) where you and the beneficiary live or pay taxes). These contributions generally grow tax-deferred.

Distributions from 529 college savings plans that are used to pay for qualified higher education expenses are 100% free from federal income taxes. In addition, the 529 plan offered by the state(s) where you and the beneficiary live or pay taxes may provide state income tax advantages exclusively for residents or taxpayers of the state. Qualified higher education expenses generally include post- secondary and vocational school tuition, reasonable room and board, books supplies and related expenses at approved institutions.

How Much Can You Contribute?

The maximum amount that can be contributed on behalf of a beneficiary varies from plan to plan. Most states allow contributions into a 529 plan account until the market value of the account reaches a certain limit, which in many cases can be greater than $200,000. For federal tax purposes, you can choose to contribute as much as $55,000 per beneficiary in the first year of a five-year period ($110,000 for married couples). The $55,000/$110,000 contribution is, in effect, treated as five separate $11,000/$22,000 annual exclusion gifts (one for the current year and then one in each of the next four years). If no other contributions are made for that person over the same five-year period, there is no gift tax. Since annual contribution limits may vary from state to state you should consult your legal or tax advisor to understand the tax implications of an investment in a particular state's 529 plan.

Who Can Contribute?

Anyone can contribute to a 529 plan on behalf of the plan's beneficiary, including parents, grandparents, other relatives and friends.

Investment Selection

You may be able to choose from among several investment options offered by the state's 529 plan, including a variety of mutual funds. Investment selection is limited to those investments offered by the state's plan, and the state sponsoring the plan has specific control over the investment of assets. However, you can name the beneficiary of the account and, under most situations, the beneficiary has no right to the funds. This means that, in general, you decide when the money should be withdrawn and how it will be used.

Coverdell Education Savings Accounts

The Coverdell Education Savings Account (CESA), formerly known as the Education IRA, allows you to set aside money for the education expenses of your children, grandchildren or other eligible beneficiaries, if you qualify.

Earnings on contributions grow tax-free while they are held in the account, and neither you nor your beneficiary will pay federal income taxes on the earnings as long as the money is used to pay for qualified expenses at an eligible educational institution, including not only colleges but elementary and high schools. Qualified expenses include tuition, room and board, academic tutoring, uniforms, transportation and equipment.

You can contribute a maximum of $2,000 a year per beneficiary, and you can choose from a wide variety of investment options. In addition, you can make contributions to a CESA on behalf of the same beneficiary during the same year for which qualified contributions are made to a 529 plan. However, all contributions to a CESA must be made before the beneficiary turns 18, and all distributions must be made by the time the beneficiary is age 30 (or transferred to another qualifying beneficiary who is under age 30).

The Plan That's Appropriate for You

Other options for education funding include gifts to certain trusts and/or custodial accounts for minor children and grandchildren. Your legal and/or tax advisor can give you the details on trusts and custodial accounts. For more information on the education funding options available to you, contact your financial advisor. He or she can help you assess your personal situation and determine which plan--or plans--is suitable for your needs. *Source: College Board – "Trends in College Pricing, 2002"

Jenny Hayes is the Divisional Assistant Vice President UBS Financial Services, Inc. She may be reached at 816.360.2241 or geneva.hayes@ubs.com.