By Charles Blair, DDS
John McGill, MBA, CPA, JD
Larger contributions are allowed to Section 529 College Savings Plans, but these plans have little investment flexibility. Conversely, Educational IRAs can be self-directed, providing much greater investment flexibility.
Is it possible to deduct money that I set aside for my children's college and/or graduate school education? I understand that contributions to Education IRAs and Section 529 College Savings Plans are now tax-deductible. Which is the best route to go?
While substantial improvements were made to the tax benefits associated with funding Education IRAs and Section 529 College Savings Plans, contributions to neither are currently tax-deductible for federal income tax purposes.
Under the new law, the amount of nondeductible annual contributions that can be made to an Educational IRA has been increased from $500 to $2,000 a year. In addition, married doctors with income up to $190,000 now can make full contributions to an Educational IRA on behalf of their children. While the earnings on Educational IRAs continue to be tax-deferred, payouts are now tax-free, as long as they are used for qualified college and/or private school expenses.
Similar favorable changes were made to the Section 529 College Savings Plans. These plans generally have much larger limits on the amount of nondeductible contributions that can be made into the account on behalf of a child. Contributions up to $100,000 or more are allowable in certain situations. Like the Educational IRA, earnings grow on a tax-deferred basis and can be withdrawn tax-free for qualified college and/or private school expenses.
Comparing the two, larger contributions are allowed to Section 529 College Savings Plans, but these plans have little investment flexibility. Each state determines the investment manager and options for investing the funds withheld in that state's plans. Conversely, Educational IRAs can be self-directed, providing much greater investment flexibility.
For more information regarding funding college/private school educational costs with tax-deductible dollars, send a self-addressed, stamped envelope ($.55) to Blair/McGill and Company, Inc., 2810 Coliseum Centre Drive, Suite 360, Charlotte, NC 28217. Request How To Cut College Costs Up to 50%.
Recently, I heard a speaker mention that the maximum contribution to profit-sharing plans (like my practice sponsors) would be going up. How much more can be put away?
Several recent tax-law changes have increased the potential tax-deductible contributions to profit-sharing plans considerably. These factors include an increase in the amount of compensation which can be taken into account for purposes of calculating retirement-plan contributions. This amount has been increased from $170,000 in 2001 to $200,000 in 2002.
Furthermore, the maximum percentage contribution to profit-sharing plans has gone up from 15 percent of compensation to 25 percent. Finally, the maximum contribution on behalf of any employee has increased to the lesser of 100 percent of compensation or $40,000.
The information provided in this column is based upon the current Internal Revenue Code, regulations, IRS rulings, and court cases as of the date of publication. This column is not to be construed as legal or tax advice with respect to any particular situation. Contact your tax attorney or other adviser before undertaking any tax-related transaction.
Dr. Blair is a nationally known consultant and lecturer, and is a member of the American Academy of Dental Practice Administration.
McGill is a tax attorney, CPA, and MBA, and is the editor of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes, and protect assets. The newsletter ($184 a year) and consulting information are available from Blair/McGill and Company, 2810 Coliseum Centre Drive, Suite 360, Charlotte, NC 28217, or call (704) 424-9780.