So how do you know whether to start an Education IRA, invest in a prepaid tuition program, or just wait and see if your child is awarded some kind of scholarship? And how do you know if the decision you make will help you meet the ever increasing costs of college tuitions? Unfortunately, no crystal ball exists that can help you answer these questions. However,with the help of a financial planning professional who can help you coordinate and optimize your choices, you can increase your potential for meeting your financial goals. In the meantime, the fundamentals of collegeplanning remain…First, consider whether you’ll save in your name or that of your child. Ifyou’re in a high tax bracket, you may want to consider putting the investment in a custodial account (UGMA or UTMA). Generally, taxation ona child’s assets under age 14 is as follows: the first $700 in unearned income (usually interest, dividends and capital gains) is tax-free, while the second $700 in unearned income is taxed at the child’s rate (usually 15 percent, 10 percent on capital gains). Unearned income above $1,400 istaxed at the parent’s marginal tax rate. For children over 14, unearnedincome beyond the first $700 is taxed at the child’s marginal tax rate.

(Please note: these numbers reflect 1999 tax considerations only and may increase in subsequent years.) Some possible drawbacks to custodial accounts are that they are irrevocable gifts; therefore, the parents cannot use the funds for their own benefit even in the case of an emergency. Also, the funds can be usedin any way the child wishes once the child has reached the age of majority. In other words, the child could take the money and decide to buya great car or travel around the world instead of going to college.

Additionally, if the child applies for financial aid, current financial aid formulas typically expect a child to contribute 35 percent of his or her own assets toward college costs. Likewise, parents could be expected tocontribute 5.6 percent of their assets.Next consider which investment vehicle you would like to use. A commongoal is to achieve the highest rate of return possible given the risk you’re willing to accept. If your child has a long time horizon (i.e. 10+ years)before college, then it may make sense to use growth-oriented investments, such as common stocks, equity mutual funds and equity unit investment trusts (UITs). If the time horizon is shorter (i.e. less than 5years), then it may be more appropriate to use certain zero coupon treasury bonds and municipal bonds.

There are a variety of investment choices you can make that combine an effective investment and tax minimization plan. What’s more, you can takeadvantage of the power of compounding by reinvesting interest and dividends. Remember, weigh all of your factors and, no matter whichinvestment vehicle you choose, the earlier you start planning the better off you’ll be, and the earlier you start investing, the more time you have to outpace the rising costs of college.

(Alan Moore is a financial advisor with Legg Mason Wood Walker, Inc., adiversified securities brokerage and financial services firm that is a member of the New York Stock Exchange, Inc. and SIPC.)

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