Smart money.

• Author: ZEIGER, DINAH
• Position: 529 plan information - Brief Article

ONE OF THE GEMS BURIED IN THE ECONOMIC Growth and Tax Relief Reconciliation Act of 2001 -- better known to most of us as the Bush tax cut -- may help you decide where to stick your refund check or any other extra savings, especially if you have kids headed for college.

The bill, signed into law in June by President George W. Bush, provides generous tax breaks for families participating in state-sponsored college savings plans, like Colorado's CollegeInvest program.

The most sweeping change makes investment earnings from so-called "529 plans" exempt from federal income tax, beginning in 2002, as long as the money is used for education. in addition, up to $50,000 ($100,000 for couples filing jointly) may be contributed in a lump sum without incurring a gift tax...again, if the money is used for college or graduate school.

For the uninitiated, a 529 plan, named for Section 529 of the Internal Revenue Code, lets you set aside money for college expenses in special investment or interest-bearing accounts, which grow tax-free until the money is used, but only if it's used for education.

"These are profound changes (in the federal tax law)," said Joe Hurley, a veritable walking encyclopedia on 529 plans. He's a certified public accountant, CEO of Savingfor-college.com, and author of "The Best Way to Save for College: A Complete Guide to 529 Plans."

For Colorado residents who invest in CollegeInvest, state lawmakers have sweetened the pot even more. Beginning in 2001, Colorado residents can deduct all contributions to college-savings plans from state income tax (earnings growth already is exempt).

Also effective this year, you can enroll at any time, and if you invest in the Prepaid Tuition Fund you'll receive a minimum annual growth rate of 4 percent. That means you can calculate now the minimum amount you'll have available when your child is ready for college.

"Colorado gave investors (in college-savings plans) a couple of big reasons to stay in-state," Hurley said. "There are still many considerations in planning for college expenses, but at least now there's less worry that income taxes will reduce the amount available to pay for college."

Still, even the best deals usually have a catch, and college-savings plans are no exception. Hurley points out the amount you save could be a detriment when it comes to financial aid considerations. That's because the money in these accounts is considered a student asset and can count against the student when...