University of Wisconsin - Extension

Beginning January 1, parents or legal guardians can contribute up to $3,000 a year for each dependent child to EdVest, the state's college savings program.

These contributions to an EdVest account are deductible from Wisconsin income tax, according to Linda Boelter, University of Wisconsin-Extension family financial management specialist.

In addition, investment earnings that are used for qualified higher education expenses are exempt from state income tax. Federal income tax on investment earnings is deferred until funds are withdrawn, after which the earnings are taxable as ordinary income at the student's tax rate.

"Participants may save for up to five years of undergraduate costs and for graduate school expenses. The minimum investment period has been reduced from four to two years, so that families with older children can also participate," Boelter says.

EdVest is a qualified state tuition program, sometimes called a "Section 529 Plan." Money invested in the program can be used to cover expenses for tuition, fees, room and board, books and equipment required for attendance at an eligible public or private institution in Wisconsin or elsewhere.

To encourage families to save in advance for college costs, assets in an EdVest account will not affect a family's eligibility for state financial aid in Wisconsin. Because EdVest accounts are intended to be used for higher education expenses, refunds are generally not available prior to the beneficiary's 18th birthday.

Full refunds (principal and earnings) are available in the event of death or permanent disability of the beneficiary or receipt of a tuition waiver or scholarship that cannot be converted to cash.

Federal tax law requires state programs to impose a 10% penalty on earnings for all other refunds, such as if a child elects not to pursue higher education, fails to gain admission, fails to complete a program of study or other refund circumstance.

Grandparents, aunts or uncles - even those living outside the state -- can also contribute to an EdVest account. Special federal gift tax provisions allow putting as much as $50,000 into a child's account in a single year with no gift tax, as long as there are no additional gifts to the same person within a five-year period.

Amounts in an EdVest account that are gifted will be excluded from the gifter's gross estate for federal estate tax purposes. Also, starting early in 2001, EdVest will open new variable investment options, such as a stock index fund and an age-based fund that automatically balances a mix of fixed and variable investments according to the age of the beneficiary. Until now, EdVest only offered a fixed investment program.

For more information on EdVest, visit the website at http://www.edvest.state.wi.us/ or call toll-free at 1-888-338-3789.

For more information on family financial management issues or to enroll in UW-Extension's "Money 2000 and Beyond" personal financial management program, contact Linda Boelter at linda.boelter@ces.uwex.edu .