• The IRS offers a 3-year window in 2010 to pay taxes on a Roth conversion.
• The IRS is letting tax payments on a conversion to be made in 2011 and 2012.
• Figuring out the tax due on a Roth conversion is not that complicated.If you have funds in an individual retirement account, converting them into a Roth IRA in 2010 presents an unprecedented opportunity to sock away tax-free retirement income.

The IRS is even offering taxpayers a three-year window in 2010 to pay taxes due on a conversion and is removing income limits that have kept higher-income taxpayers from setting up Roth IRAs.

Many taxpayers have been able to convert their traditional IRAs to Roth IRAs since Roth IRAs were created in 1998. However, income limits and other restrictions have kept many taxpayers from converting. If their modified gross income is more than $100,000, they haven’t been able to convert. But in 2010, they’ll get their first opportunity.

You don’t have to wait until then if your  modified adjusted gross income — your income minus certain deductions — is less than $100,000 and, if married, you file as “married filing jointly.” You could convert in 2009. However, to take advantage of special tax breaks offered only after Jan. 1, it may make sense to hold off, says Brent Lindell, a certified trust and financial adviser with Savant Capital Management in Rockford, Ill.

Roth IRAs differ from traditional IRAs in several crucial ways. While you don’t get a tax deduction for making a contribution to a Roth IRA, those contributions you may not have to pay any tax upon withdrawal in retirement. In addition, Roth IRAs aren’t subject to the same minimum distribution requirements that traditional IRAs are, so you don’t have to begin withdrawals from your Roth IRA at age 70½.

And because most retirement accounts took a heavy beating in the stock market in 2007 and 2008 and still haven’t recovered, the taxes due on a conversion are less than they would be had the market risen, making the case for conversion even more compelling, says Dave Sadler, a certified public accountant and Certified Financial Planner with Moneta Group, a wealth management firm in St. Louis.

If that’s not enough, the IRS is allowing taxpayers a one-time opportunity to spread out the payment of taxes due on a Roth conversion in 2010 over 2011 and 2012.

Taxes are due on a Roth conversion because you get a tax deduction on your initial contributions to most traditional IRAs, so you must pay the taxes due on those initial contributions and any growth in your IRA. Your tax bill on conversion also depends on a number of other factors, including your income, your federal tax bracket and your state tax rate.

Roth IRA conversions don’t make sense for everyone, but it’s worth investigating to decide whether it makes sense for you.

“The issue comes down to what your tax situation is in the year of conversion versus what it might be in retirement,” Sadler says.

“It’s a hard thing to know for sure, but I would say it makes the most sense for younger taxpayers who will have their income grow over time,” he says.

7 steps to a Roth IRA conversion

1. Evaluate your IRA and 401(k).
2. Seek advice if you’re unsure.
3. Weigh financial and tax factors.
4. Calculate the potential tax due.
5. Decide when to pay the tax bill.
6. Consider when to convert.
7. Fill out conversion paperwork.

Step 1: Evaluate your IRA and 401(k)

First, you need to get a handle on what assets you’ve got that are eligible for conversion into a Roth. Generally, any assets that you hold in a traditional IRA, whether they are deductible or nondeductible, are eligible. Nondeductible IRA contributions are not taxed when you make a conversion, although earnings from those contributions are taxed.

If you have a 401(k) or 403(b) from a former employer, you may want to roll them into an IRA this year so they will be eligible for rollover along with your other IRA assets. It’s a two-step process, first you roll over your old 401(k)s and 403(b)s into a traditional IRA. Then, you convert the traditional IRA to a Roth. That’s where the tax is due.

The higher the balance in your IRA or IRAs, the higher your tax bill will be if you convert. However, if you invested aggressively in the stock market and your account value is still down from two years ago, you won’t owe as much in taxes as you would have if the account total had been higher, Lindell says.

Under IRS rules, you have to consider the entire value of all of your IRAs when converting and figuring taxes on the conversion, if you have nondeductible IRA contributions.

“(In that instance,) even if you don’t want to convert the entire balance of all of your IRA accounts, whatever percentage you want to convert has to include assets from all of your IRA accounts,” Lindell says.

For example, if you have four traditional IRAs worth $100,000 and those accounts included nondeductible contributions, but you only want to convert $50,000 of those assets (all from one IRA), the IRS won’t allow you to convert only the assets that lost money. You have to take assets from all of your IRAs, not just the losing ones.

Step 2: Seek advice if you’re unsure

If you are considering conversion but are too confused to attempt it on your own, there are lots of places to find help, including the financial services firm that is the custodian of your IRA, or your tax professional or financial adviser.

If you don’t work with a tax professional, get a referral to a reputable local firm. Many offer consultations on these issues for free, says Jim Ciocia, a certified public accountant and chairman at Gilman Ciocia Inc., a tax and financial planning firm in Tampa, Fla. Make sure any advice you get is specific to your situation, he adds.

Step 3: Weigh financial and tax factors

For many taxpayers, the decision to convert is highly individual. How old you are and your present tax bracket all factor in.

“An important factor in deciding whether to convert is considering how much time you have before you retire and will potentially need to use the money,” Ciocia says.

The higher your tax bracket, the more tax you will have to pay on conversion. But if you expect taxes to go up in the long term, conversion makes sense because you may have to pay a higher tax rate in retirement than you expect now, Ciocia says. If you convert, you’ll have a tax-free source of retirement income along with any taxable source of income, such as a traditional IRA, 401(k) or 403(b).

As Ciocia puts it, “Would you rather pay taxes when you plant the seeds or harvest the crop?” In other words, you likely would pay less in taxes on a $5,000 Roth IRA contribution than you would if you had left the money in a traditional IRA and it grew to $34,242 after 25 years of tax-free growth at 8 percent.

In that example, even at a low 15 percent tax rate, your taxes would be $5,136.30 if you left the money in a traditional IRA — far higher than what you will pay now on a $5,000 conversion to a Roth.

Step 4: Calculate the potential tax due

Figuring out the tax due on conversion is not that complicated. Basically, you owe federal and state taxes on your contributions and any gains, meaning the entire value of your IRA, unless you made nondeductible contributions. If you made nondeductible contributions, you would subtract those from your current total IRA account balances to come up with the amount that will be taxed.

Here’s an example:

You’ll still get a break in when you pay your taxes. Using the above example, with $12,000 in federal taxes due, you wouldn’t have to pay any of that in 2010; you’ll owe $6,000 in 2011 and another $6,000 in 2012.

Step 5: Decide when to pay the tax bill

There are a few other issues to consider when deciding whether to pay the tax due immediately after conversion — if you can afford to — or defer it.

“Whether you want to pay the taxes in 2010 or spread it out over the next two years depends on how consistent your tax situation is,” Sadler says. “If you’re a W-2 employee and don’t have any capital gains or other types of holdings that might create surprises along the way, … you aren’t likely to see a huge tax increase. So I would think deferring those taxes over a two-year period would make sense.”

Many tax advisers agree that for a Roth conversion to make sense, you should be able to pay taxes from your income or another source, not from funds taken from your IRA.

“If you’re thinking about cashing in part of your IRA to pay the tax bill on it, forget it,” Savant Capital’s Lindell says. “You’re defeated already.”

That’s because you’ll have to pay interest and penalties on any IRA funds you remove from your account to pay taxes. Paying the taxes from your IRA account also will reduce your balance and your ultimate nest egg when you retire, he adds.

Step 6: Consider when to convert

The earliest you can convert if you want to take advantage of the two-year tax deferral is Jan. 1, 2010, if your income is currently over the $100,000 limit and/or you plan to file as “married, filing separately.” If your income isn’t over the limit and you can afford to pay the tax now, there’s no reason to wait, especially if your traditional IRA dropped in value. If it appreciates between now and Jan. 1, your taxes in conversion will be higher, says Ciocia of Gilman Ciocia.

For many taxpayers, it makes sense to convert as early in 2010 as possible to gain as much possible from the tax-free growth that a Roth offers. However, if you’re unsure of what your income will be and what tax bracket you’ll be in, it makes sense to wait until the second half of 2010 to get a better handle on the tax consequences, says Sadler.

And don’t forget, there are no income limits beginning in 2010. So if you wait to convert, you can do it regardless of your income.

Step 7: Fill out conversion paperwork

The conversion paperwork isn’t that complicated. If you have made nondeductible contributions to your IRA, you will need to know how much you contributed in nondeductible contributions, which you can find in your income tax forms on Form 8606, Nondeductible IRAs.

You’ll need to let the custodian of your IRA — the mutual fund, bank or other financial services company that holds your account — know certain information, including:

• How you want your converted assets invested.
• Whether you will pay the taxes due yourself or want the custodian to withhold the amount from the IRA’s assets to pay them.
• Who you want to name as a beneficiary to receive the money upon your death.

By Amy E. Buttell • Bankrate.com

Amy E. Buttell is a frequent contributor to Bankrate.com, Interest.com and Better Investing Magazine. From her home base in Erie, Pa., she is studying accounting and financial planning with the goal of earning the certified public accountant and certified financial planner designations.

At no time since the Great Depression have college students worried more about money. Tuition continues to rise, financing sources continue to contract. So why should a student worry about finding money for, of all things, retirement?

Because even a few dollars a week put toward a Roth IRA can reap enormous benefits over the 40-50 years of a career lifetime that today’s average college student will complete after graduation. Take the example of an 18-year-old who contributes $5,000 each year of school until she graduates. Assume that $20,000 grows at 7.5 percent a year until age 65 – that would mean more than a half million dollars from that initial four-year investment without adding another dime.

Consider what would happen if she added more.

There are a few considerations before a student starts to accumulate funds for the IRA. First, students should try and avoid or extinguish as much debt – particularly high-rate credit card debt – as possible. Then, it’s time to establish an emergency fund of 3-6 months of living expenses to make sure that a student can continue to afford the basics at school if an unexpected problem occurs.

Certainly $5,000 a year sounds like an enormous amount of outside money for today’s student to gather, but it’s not impossible. Here’s some information about Roth IRAs and ideas for students to find the money to fund them.

The basics of Roth IRAs: It’s good to start with describing the difference between a traditional IRA and a Roth IRA and why Roths might be a better choice for the average student. Traditional IRAs allow investors to save money tax-deferred with deductible contributions until they’re ready to begin withdrawals anytime between age 59 ½ and 70 ½. Roth IRAs don’t allow tax-deductible contributions, but they allow tax-free withdrawal of funds with no mandatory distribution age and allow these assets to pass to heirs tax-free as well. If someone leaves their savings in the Roth for at least five years and waits until they’re 59 1/2 to take withdrawals, they’ll never pay taxes on the gains. For someone in their late teens and early 20s, that offers the potential for significant earnings over decades with great tax consequences later.

Getting started is easy: Some banks, brokerages and mutual fund companies will let an investor open a Roth IRA for as little as $50 and $25 a month afterward. It’s a good idea to check around for the lowest minimum amounts that can get a student in the game so they can plan to increase those contributions as their income goes up over time. Also, some institutions offer cash bonuses for starting an account. Go with the best deal and start by putting that bonus right into the account.

It’s wise to get advice first: Every student’s financial situation is different. One of the best gifts a student can get is an early visit – accompanied by their parents – to a financial advisor such as a Certified Financial Planner™ professional. A planner trained in working with students can certainly talk about this IRA idea, but also provide a broader viewpoint on a student’s overall goals and challenges. While starting an early IRA is a great idea for everyone, students may also need to know how to find scholarships and grants and smart ideas for borrowing to stay in school. A good planner is a one-stop source of advice for all those issues unique to the student’s situation.

Plan to invest a set percentage from the student’s vacation, part-time or work/study paychecks: People who save in excess of 10 percent of their earnings are much better positioned for retirement than anyone else. Remarkably few people set that goal. One of the benefits of the IRA idea is it gets students committing early to the 10 percent figure every time they deposit a paycheck. It’s a habit that will help them build a good life.

Get relatives to contribute: If a student regularly gets gifts of money from relatives, it might not be a bad idea to mention the IRA idea to those relatives. Adults like to help kids who are smart with money, and if the student can commit to this savings plan rather than blowing it at the mall, they might feel considerably better about the money they give away. At a minimum, the student should earmark a set amount of “found” money like birthday and holiday gift money toward a Roth IRA in excess of the 10 percent figure.

August 2009 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Martin V. Higgins, CFP, CLU, AEP, a local member of FPA.

One good thing that might come from all the attention on Michael Jackson’s estate is that it may motivate people to get their own affairs in order. In addition, there are lessons to be learned that readers can apply to their own situation.

Michael’s will, dated March 22, 2002 was probated in California on July 1, 2009. The will was actually relatively straightforward and devoid of the weirdness that we have come to expect from Michael Jackson. The will is a pour-over will which many estate attorneys, including me, often recommend for medium or large estates. The pour-over will basically says all money or property that had not already been transferred to the Michael Jackson Family Trust while Michael was alive should be transferred to the trust after his death.

The Michael Jackson Family Trust is a trust that Michael Jackson formed during his lifetime. If his attorneys were crossing their t’s and dotting their i’s, Michael most likely transferred the majority of his assets to this trust. The simplified terms (put in my words) of the trust are likely as follows.

Michael named himself as the first trustee and while he was alive, he could do anything he wanted with the property in the trust. He could spend the money, burn the money, buy property, buy an interest in royalties of the Beatles music, buy art, incur debt, whatever he wanted.

Note that Michael’s will, like virtually all wills, became a matter of public record. The exact terms of the Michael Jackson Family Trust, however, are not a matter of public record. That is an additional advantage of the trust for those preferring to keep their affairs private. In the state of California, though, some details of the trust become a matter of public record, so we know that the beneficiaries of the Michael Jackson Family Trust include Michael’s mother, Katherine, the singer’s children and a charitable trust.

Three co-executors of the will were named in 2002 including long-time Jackson attorney, John Branca, music executive, John McClain, and Jackson’s accountant, Barry Siegel. However, Barry Siegel resigned from his role as executor in 2003. It is now the responsibility of Branca and McClain to transfer any assets that were not already transferred to the Michael Jackson Family Trust to the trust. In addition, Branca and McClain will also serve as successor trustees of the Michael Jackson Family Trust.

So, one lesson is that someone even as screwy as Michael Jackson had a will. The pour-over will is an excellent method of keeping your affairs private. A bigger advantage for most readers, however, is that the configuration of a pour-over will with a family trust avoids probate. For most people avoiding probate, though not critical, is usually a good thing. Avoiding probate reduces fees that the state charges, reduces attorney’s fees and keeps the court out as much as possible.

The most interesting thing to me about Michael’s will is the contingent guardian of his minor children. His first choice was Katherine Jackson, his mother, a choice many parents make. In the event Katherine either isn’t able to serve as a guardian or declines to serve as a guardian, Michael’s next choice is singer, Diana Ross!

Another lesson that parents of young children can learn is that Michael did the responsible thing of making a will and stating who he wanted to be the guardian of his children in the event of his death. Even if a parent of a young child or children has no money or no life insurance, they should still do a will to make known their choice of guardian in the event of their death.

You may question whether leaving his children to the care of his 79-year-old mother, Katherine Jackson, was wise. Another thing you may question is whether his contingent guardian (in case his Mother could or would not serve as guardian), 65-year-old singer, Diana Ross, was wise. For one thing, the will was dated July 7, 2002 when they were five years younger. The important thing, however, is that Michael presumably considered the matter and made his wishes known when he prepared his will. I wish all parents of young children would do the same.

If you are interested in reading Michael Jackson’s will, please click on the following link.

http://www.docstoc.com/docs/8016703/Michael-Jacksons-Will

Taking Things a Little Deeper: A Life Insurance Lesson

Certainly we will hear many things regarding Michael’s estate in the coming weeks, months and possibly years. Assets like Michael’s 50 percent interest in the Sony/ATV music catalog (including rights to thousands of hit songs by everyone from the Beatles to the Jonas Brothers) valued between $500 million to $1.5 billion certainly pique our attention. The fact that the estate is also burdened by his personal debts of an estimated $500 million will most likely also receive a lot of attention.

One lesson is that if you have assets that are hard to value and are not terribly liquid, you should consider life insurance. The life insurance proceeds, if set up correctly, would be free of income taxes and estate taxes. The proceeds could be used to pay debts of the estate and taxes on the estate. If Michael had sufficient life insurance, his interest in the royalties would not have to be sold in a fire sale to pay the taxes on that same asset—something that may happen now.

There is another lesson that will probably not be talked about by anyone except me. So, here is some unique wisdom. This advice is terribly relevant for millions of IRA and retirement plan owners today.

A 401(k) Lesson

Though not much is known about Michael Jackson’s estate planning, if he got good advice, it is a good bet that Michael had either a 401(k) plan or some type of retirement plan. Since he made a lot of money, he may have been limited in how much he was allowed to deduct on his federal and California taxes for the contribution to his 401(k). Even if he wasn’t allowed to deduct it, it still would have been wise for him to make the highest contribution allowed. After-tax dollars inside a retirement plan, incidentally, are conceptually the same as a nondeductible IRA. He may have had other retirement plans and possibly an IRA. For our discussion, let us assume that he had a 401(k) plan and the ultimate beneficiary of his 401(k) plan is a trust for the benefit of his children, the oldest of which is 12 years old. Because his children are likely to be taxed at the highest rates for the rest of their lives and because trusts in general have the highest tax rates of any entity, it is a good bet that the IRS will collect a lot of taxes on that money. The IRS will likely collect both estate taxes within nine months of his death and income taxes on those retirement funds, though hopefully they will have to wait for the income taxes.

It is a reasonable bet that the advisors involved will know enough to ensure that the distributions from the inherited 401(k) plan should be distributed over the children’s lifetimes. The impact of making small distributions over many years is to defer the payment of income tax due when the 401(k) plan or a portion of the 401(k) plan is distributed to the children.

It is an important lesson to IRA and retirement plan owners as well as beneficiaries to plan for the deferral (or putting off) of the income taxes on the inherited 401(k) or IRA as long as possible.
What the advisors to Michael’s family likely don’t know is that Michael’s children could make a Roth IRA conversion of the inherited 401(k) plan. Just like individuals making a Roth IRA conversion, his children could pay income tax on the inherited 401(k) plan now and have all future growth of the plan income tax-free.

In effect what they would be doing is paying tax on the seed and reaping the harvest tax-free. Interestingly enough, if Michael had made a trustee to trustee transfer (more commonly known as a rollover) from his 401(k) plan to an IRA, his children would not have the option of making a Roth IRA conversion of the inherited IRA.

Though he probably had a bigger balance, to make it more relevant to more readers, let’s assume Michael had $1 million in his 401(k) plan. The benefits to the children for making a conversion of the inherited 401(k) to an inherited Roth IRA could be measured in tens of millions of dollars over their lifetime (details available).

One of the lessons here is that beneficiaries of 401(k) plans have options upon the death of their loved one.  They should not blindly follow the advice of the person at the bank or even their attorney or financial advisor.  I would bet that the big shot attorneys Michael was dealing with do not know about making a Roth IRA conversion of an inherited 401(k).  True, this is a relatively new law, but it is so important, it pays for consumers to keep up.

A more relevant lesson for many more people is to question the old wisdom of automatically rolling over (technically doing a trustee to trustee transfer) of your 401(k) plan to an IRA.  Several potential benefits of keeping your money in your existing 401(k) plan or even creating your own one person 401(k) plan include:

1. Possibility of a good fixed-income account in your existing 401(k) often referred to as a GIC (Guaranteed Income Contract).  This would only apply to keeping money in your existing 401(k) plan.

2. The ability for the 401(k) owner to make a Roth IRA conversion of after-tax dollars inside the 401(k) to a Roth IRA without having to pay the tax.

3. The protection of ERISA (Employee Retirement Income Security Act) meaning a higher level of creditor protection than just an IRA.

4. As mentioned above, the ability of the heirs to make a Roth IRA conversion of the inherited 401(k) that they could not do with an inherited IRA.

Remember, if you already have the bulk of your retirement plan dollars in an IRA and still have earned income, you may be able to create your own one-person 401(k) plan and make a Roth IRA conversion of the after-tax dollars inside of your 401(k) or IRA tax-free.

I hope readers will learn from Michael’s estate and some of the weirdness will be overlooked by the lessons to be learned.

* * * * * * * * * * * * * * * *

James Lange is a nationally recognized IRA, Roth IRA, 401(k) and retirement plan distribution expert. He is the author of two best-selling editions of the book, Retire Secure! Pay Taxes Later (the 2nd edition was released in February 2009 by Wiley). Mr. Lange has been quoted 30 times in The Wall Street Journal and is a frequent contributor to numerous media outlets including Newsweek, Bottom Line, and Kiplinger’s Retirement Report. He also founded the Roth IRA Institute this year to “advise advisors” and launched his own radio show on KQV am 1410 in Pittsburgh. Audio archives are available at www.retiresecure.com.

James Lange is a tax attorney and CPA with a thriving retirement and estate planning practice in Pittsburgh, Pennsylvania.  He focuses on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans.  His plans include tax-savvy advice, will and trust preparation, and intricate beneficiary designations for IRAs and other retirement plans.  Jim’s advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, and his articles are frequently published in Financial Planning, Kiplinger’s Retirement Report and The Tax Adviser.

It’s a few short weeks until cap and gown season begins, and for grandparents hoping to do something nice for their grandkids and something sensible for their estate, there are several options to explore.

Roth IRAs: The Roth option is a good one if you want to help them start a retirement fund of their own or if you want them to inherit a Roth where they can make tax-free withdrawals after your death.

Roth IRAs aren’t a useful alternative for very young kids because the rules state that all Roth holders have to have earned income to be able to make contributions. If they fit that description – as many kids working in high school do – either their parents or guardians can open the account and grandparents can make contributions to match the percentage of earnings kids put in their Roth IRA. Grandparents simply match that contribution.

Also, if you have a Roth IRA, you can benefit your grandchildren by naming them as your primary beneficiaries, and when they inherit it, they’ll be able to make tax-free withdrawals for a home, an education or any other purpose.

Parents or grandparents may want to consider setting up and funding a Roth IRA for their children or grandchildren as soon as the children or grandchildren have enough earned income from part-time or summer jobs. This will ensure that the five-year requirement is met when the individual for whom the Roth IRA is established is ready to make a withdrawal to buy a home, for example.

529 Plans: Another great tool for grandparents is the 529 college savings plan. Grandparents can fill out a plan enrollment form designating a grandchild as beneficiary, select the investments from the plan’s options, and make future contributions either by check or by automatic contribution.  It’s also fine for grandparents to make their contributions directly to a 529 account already owned by the grandchild’s parents.

As a refresher, 529 college savings plans – named for the federal law that created them in 1996 – allows a parent to open a tax-deferred college savings plan with as little as $25 to start in some states.  A 529 college savings plan is not the same thing as a 529 prepaid college tuition plan. Prepaid tuition plans are just that – tax-deferred savings plans that allow you to save for tuition for in-state schools (though some plans allow you to transfer out a portion of those assets to out-of-state schools). Also, it’s important to note that prepaid tuition plans are not an automatic guarantee a student will get into that college.

Since 2006, withdrawals from 529 plans have been permanently tax-free. In some states, contributions may also be deductible on state tax returns. All 50 states now have 529 plans college savings plans, and a majority of them provides additional incentives, such as a state-tax deduction to in-state residents who invest in their respective plan.

It’s a good idea to have your financial adviser or your CERTIFIED FINANCIAL PLANNER (TM) professional help you sort through the details of various state plans. There are various services – including Morningstar Inc. – that now rank the offerings of each state’s plan.  www.SavingforCollege.com and www.FinAid.org are leading sites to help educate you in how these plans work.

Grandparents can treat their contribution as complete gifts, which means they can apply the $12,000 per year gift tax annual exclusion or an accelerated contribution of up to $60,000, with a special five-year, gift-spreading election. Check with your tax adviser first.

Another great benefit is that a 529 plan owned by grandparents should not affect the grandchild’s eligibility to receive federal financial aid because a grandparent’s assets are not reportable on the free application for federal student aid, or FAFSA, and the tax-free withdrawals from a grandparent-owned 529 plan are not counted as student income or student resources.

Coverdell Education Savings Accounts: For grandchildren heading to private school who are under the age of 18, most grandparents – check your eligibility with a tax professional first – can contribute up to 2,000 dollars annually per grandchild to a Coverdale Educational Savings Account.  Coverdell earnings accumulate free of federal income taxes, and can be taken to pay for private elementary, secondary or college. Yet, your income is a factor. You can make a Coverdell contribution as long as your modified adjusted gross income is between 95,000 and 110,000 dollars if you’re single or between 190,000 and 220,000 dollars if you’re a married and filing jointly.  Yet, if you exceed either of these requirements, you can ask the parent of the adult child to open up the account and make the contribution, though you will have to give up control over the account.

Make a direct gift of your grandchild’s tuition: Under current tax law, you can make gifts of any amount to cover your grandchild’s tuition. Yet, you’re going to need to pay the college directly and you need to be aware that it won’t dent your federal estate tax exemption (3.5 million dollars in 2009), but it will cut the overall amount of your taxable estate.  You can, however, go ahead and make additional gifts per grandchild of $13,000 to help with other college expenses.

April 2009 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Martin V Higgins,CFP , a local member of FPA.