Tracy Byrnes chatted with Joe Hurley on Yahoo!, Thursday, Oct. 26 at 5 p.m. EDT.

laura_the_street:

Welcome to

TheStreet.com

on Yahoo! Today we'll be chatting with Senior tax reporter

Tracy Byrnes

, and author

Joe Hurley

. They'll chat with you on how to finance your child's college education.

tracy_tsc2000:

Hey all. Welcome. Saving for college can be a scary feat, we know that. That's why we called in an expert. Joe is going to tell us everything we need to know about using the state's savings plans to save for college. Welcome, Joe!

joe_hurley2001:

Thanks Tracy, nice to be here.

yo_im_unbelieveable asks:

When do I start saving up?

laura_the_street:

yo_im is on his own. He is trying to finance his education. How does he get started?

tracy_tsc2000:

Good for you for thinking about this.

joe_hurley2001:

First try to figure out how much it is going to cost you. That way you can know what the target is.

tracy_tsc2000:

Then how should he begin? Once he knows his target?

joe_hurley2001:

There are a few options to think about.

One is the education IRA, and another is the section 529 state savings plans. Of course the education IRA is only available if you are under 18. But the state savings plans -- I call them 529 plans -- are available to everyone.

tracy_tsc2000:

But what does the education IRA get you with its measly $500 annual limit?

joe_hurley2001:

Well you can get tax-free earnings. So no matter how much it is it can help. But the problem with the education IRA is that if you use the tax exemption, you lose the education credits. The education credits are the HOPE and lifetime learning credits.

rinpardee asks:

How do you "get" an education IRA?

joe_hurley2001:

You can go to any number of financial institutions or mutual fund companies that offer them. Some places do not because they are expensive to operate for such small balances.

tracy_tsc2000:

Any one can make a contribution on a kid's behalf. So Grandpa, get out there and help little Johnny out.

xmastreehill asks:

I live in CT, their 529 plan looks great, but it gets less aggressive every two years, and while I love the tax deduction it doesn't seem worth it to me. I'd rather be a little more aggressive, at least for a few years while my daughter gets older, what's your opinion?

joe_hurley2001:

You have the option to select from 25 other states if you don't like the plan in your state. Other states may have more aggressive investment options. But once you are in a more aggressive option, remember that you cannot simply switch around if you get nervous later on. That's one of the considerations with a 529 plan -- not much investment control. Of course you always have the "rollover option" if you want to get into a different state. But the quirk here is that you have to change the beneficiary to another family member for the rollover to work.

tracy_tsc2000:

But if my child is 2, don't you think I'll do better putting my money in, say, the

Vanguard Total Stock fund

? Or better yet -- unborn!

joe_hurley2001:

That's certainly possible, but consider that you can find the Vanguard Institutional Index fund in a 529 plan (Utah). Part of the planning process would be comparing your capital gains rate to your child's ordinary income rate. The earnings in a 529 plan are taxed to the student when used for college.

tracy_tsc2000:

So the earnings from a 529 plan are taxed at the kid's rate. So does that mean the account is in the kid's name and can he run off with it at the age of majority?

joe_hurley2001:

Not at all ... the nice thing about a 529 is the account owner is always in control.

tracy_tsc2000:

That's awesome!

joe_hurley2001:

So no need to worry about the funds like you do with an UGMA.

tracy_tsc2000:

That's a unified gift and minors act account. Why do you need to worry about it with an UGMA? Can little Johnny go buy a corvette with the money at age 18?

joe_hurley2001:

Sure can. Either 18 or 21.

tracy_tsc2000:

Whoa. So is there ever a good time to put money in a kid's name?

joe_hurley2001:

A small amount may be ok. But don't go with a lot. It also hurts financial aid.

tracy_tsc2000:

Right -- b/c any money in the kid.

joe_hurley2001:

That's right. A 529 account belongs to the parent/owner, so it doesn't count nearly as much in the formula.

xmastreehill asks:

Are there any caveats to the 529 plans with the coming elections? Does the financial aid administer take into account the 529 plan when deciding on how much financial aid to give?

joe_hurley2001:

Well we answered the financial aid question. It counts, but not very much. As far as the elections go, both candidates are supporting complete tax exemption for 529 plans. So there's a good chance that could happen.

tracy_tsc2000:

The 529 plans don't count against the kid b/c it's in the parents' name. So let's talk about the perks to these 529 plans.

joe_hurley2001:

Sure. There is tax-deferred growth, shifting the income to the student when distributions are made, and complete control held by the parent/owner.

tracy_tsc2000:

I love it.

joe_hurley2001:

They can also help for anyone thinking about estate taxes. Because the account is removed from your estate. You do have to think about gift taxes. But you can give up to $10,000 per year for each beneficiary under the gift tax annual exclusion. And there is an election to make a contribution up to $50,000 without gift tax. You use up five years of $10,000 exclusions all at once.

tracy_tsc2000:

So you think these plans are a better option than, say, the Vanguard total stock fund?

joe_hurley2001:

I can't predict investment performance. But on an after-tax basis, it is certainly possible. If you like the safety of fixed income investments, then the 529 plans look even better.

tracy_tsc2000:

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But aren't there two different types of 529 plans?

joe_hurley2001:

Yes. There are prepaid tuition plans and college savings plans. The prepaid tuition plans allow you to purchase tomorrow's tuition today. So you don't have to lose sleep about tuition increases if your child is headed to a public university in the state. The college savings plans are more like mutual funds. They are invested in funds, and so have greater upside (and downside) potential.

tracy_tsc2000:

So you can't rollover a state tuition plan?

joe_hurley2001:

Most prepaid tuition plans have penalties that make this impractical.

tracy_tsc2000:

Gotcha.

xmastreehill asks:

Are there any restrictions on what college you can use the money for?

joe_hurley2001:

With the college savings plans, no restrictions. This means any college or graduate school in the country. The prepaid tuition plans can also be used anywhere, but sometimes you lose value if you go out of state.

ph_goggles asks:

Are there any benefits, tax-wise to putting money in a fund for a nephew or niece, not your own child?

joe_hurley2001:

If you are planning to pay for their education, you definitely should look at the tax side. You can get the same tax breaks with an education IRA or 529 plan as you would for your own child.

tracy_tsc2000:

So no special breaks for a generous relative.

rinpardee asks:

How much $ do I need to open an education IRA?

joe_hurley2001:

You will need to check with the place you want to open it. Some have minimums as low as $15.

tracy_tsc2000:

How much do you need to open a 529 plan?

joe_hurley2001:

That varies, too, but again $15 or $25 will work in some states.

tracy_tsc2000:

That's cool.

xmastreehill asks:

How much difference does the fees charged by states differ?

joe_hurley2001:

Good question. You will want to check that. Some are as low as 0.30% and others can be as high as 1.7% of assets each year. You may also be subject to annual account fees from zero to $50 so be sure to check with the state.

tracy_tsc2000:

What are some other things to look for when deciding on a plan?

joe_hurley2001:

One thing is how to get out of the plan if you don't like the way it is performing. A few states will lock you in until your child turns 18. I caution people about those. The other major consideration is the investment approach used by the states. Some provide a menu of options that give you a fairly broad range.

xmastreehill asks:

Hopefully this would never happen, but what kind of penalty would there be if the child you've been saving for says college is not for him/her and there are no other children to pass it on to and thus the parents simply take it back for themselves?

joe_hurley2001:

The state would charge a penalty of usually 10% of the earnings. That means you get back 100% of your principal and 90% of the earnings.

tracy_tsc2000:

That's not so bad actually.

Would you start a 15-year-old in a 520 plan or are they best for little ones?

joe_hurley2001:

The younger the better, but if you are saving for any age, and otherwise paying taxes on your investments, then I think the 529 is a good way to go.

tracy_tsc2000:

So I know that if I roll from one state plan to another, I must change the beneficiary, but can I ever get back to the original beneficiary?

joe_hurley2001:

Yes. Just do a two-step rollover. It's a little bit of a hassle but certainly can be done.

tracy_tsc2000:

Are there fees involved with rolling over?

joe_hurley2001:

Usually not.

tracy_tsc2000:

very cool.

But I would think that too much movement would have an adverse affect on your returns?

joe_hurley2001:

It really depends on the investments you are moving from and to.

tracy_tsc2000:

So the moral here is really investigate before you chose a plan. Check out the story we did a while back:

www.thestreet.com/funds/taxes/763812.html.

Joe, tell us about your book.

joe_hurley2001:

It gives a full explanation of all the 529 considerations. Also my website at www.savingforcollege.com

tracy_tsc2000:

So you can email Joe if you have questions.

joe_hurley2001:

There's a link on the web site, also a message board for questions.

tracy_tsc2000:

Or send them to the

investorforum@thestreet.com and we'll hunt Joe down.

ph_goggles asks:

What do you think, Mets or Yankees?

tracy_tsc2000:

I gotta say Mets to keep household happy!

joe_hurley2001:

I'm like Hillary. I like both.

tracy_tsc2000:

Perfect!

Wow! What a ton of information here! Joe, thanks so much for taking the time to help us out!

joe_hurley2001:

My pleasure!