Article: College Planning, How Pension Protection Act Of 2006 Can Affect It.

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Puthan(VJ) Vijayan is the Principal member of PMV Investment Advisors, LLC. The firm is a Registered Investment Advisor. VJ is a Certified Estate Planner and Registered Financial Consultant, with over 15 years of planning and investment experience.

The recent tax law changes and the Pension Protection Act of 2006 along with the new "kiddie tax" rules-how will this alter savings for college strategies.

The Pension Protection Act removes the uncertainty due to 529 plan withdrawals.  The Act allows qualified withdrawals from 529 college savings plans remain free from federal taxes.  Prior,tax free status was set to expire 2010.

New "Kiddie tax" rules begin in 2006-unearned income apply to children up to 18 yrs(prior,it was 14yrs).  Per children,the first $850 of unearned income(typically from interest,dividends,cpaital gains) is tax free.  Next $850 taxed at the child's lower rate.
Unearned income above $1700 is subject to the parent's tax rate.

Parents planning for college funding have been using custodial accounts for college savings,before the advent of 529 plans.  The new laws could mean less flexibility in the
college planning process.  UTMA and UGMA accounts were set up prior to 529 plans and many used aggressive strategies.  Also, these accounts have accumulated significant sums.

It may be advantageous to move those assets to more conservative investments
or money market accounts as their children approach higher education.  But, by
doing it before age 18 now means paying taxes on portion of those gains at parents
rate.  But for most parents with large accumulated holdings and teenage children, it
may benefit significantly by staying put until age 18.

Rolling UGMA/UTMA assets into 529 plans,parents may still have to pay taxes on
any gains at the time of the rollover.  Also, those assets rolled into 529 plans are still owned by the child within the 529 plan.  Parents could lose control of the account when child reaches majority age.

November 17,2006

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