By Frank Bilovsky
Democrat and Chronicle

(Sunday, January 27, 2002) -- The old rule of thumb was that buying a house would probably be your life's biggest single expense.

Not true for Ian and Leah Powell of Honeoye Falls.

The Powells have a son in sixth grade, a daughter in fourth grade and twin daughters in first grade. If college tuitions continue to escalate at their present clip, their house won't even be a close second to the cost of educating their four children.

"Tyler wants to be an engineer like his dad, so we figure that's going to be big bucks," Leah says. "Actually, everything will probably be big bucks. Scary thought!"

But not as scary as if the Powells hadn't begun to plan for those costs eight years ago, when they began buying a mutual fund dedicated to Tyler's education.

Oldest daughter Lindsay also has money in a mutual fund for the same purpose.

More recently, the Powells have branched into different modes of saving.

"One way is we refinanced our house, so it will be fully paid for before my son even graduates from high school," Leah says. "That's one way of increasing cash flow later when we'll need it more."

The other way is through the New York state 529 plan. The plan is one of 40 state-sponsored college savings plans on the market today. By the end of the year, all 50 states are expected to be offering the plans.

Although they have been around only about five years, the plans became extremely popular even before the federal tax law changes enacted last year. Now their popularity seems destined to grow because all money earned in the accounts is tax free when the money is withdrawn and used for the beneficiary's college education.

"At the end of 2000, the amount of money in the savings programs nationwide was about $2.5 billion," said Joseph F. Hurley, an accountant with Pittsford's Bonadio & Co. and author of The Best Way to Save for College: A Complete Guide to the 529 Plans. "When the figures are in for the end of last year, we expect it to be $9 billion."

And that's even though most plans lost money last year because of the stock market woes. Still, investment pros point out that the plans should be viewed as long-term investments subject to year-to-year fluctuations but likely over time to outperform other savings vehicles.

Another tax-free way to save for college, Hurley said, is the Coverdell Education Savings Account, formerly known as the Education IRA. That vehicle also become more attractive after the tax changes.

While it always had a tax-free provision, funding the Coverdell was previously limited to $50 annually per child. Now it has been increased to $2,000. Also, the money can be used for elementary and secondary education costs as well as college.

One reason the Powells like the New York state 529 plan is that the first $5,000 contribution each year is exempt from New York state taxes. Hurley pointed out that the plans also have become more flexible.

"Now you can (transfer funds) from one state's (plan) to another every 12 months," he said. "You can switch investment options within a state's program when it does offer a menu."

New York's 4-year-old 529, administered by the TIAA-CREF financial service company, offers two plans that automatically adjust according to the child's age, becoming more conservatively invested as the beneficiary moves closer to college age. The state also offers two other 529 plans -- an equity index fund and an option that guarantees the principal and pays interest at a minimum of 3 percent, an attractive feature in today's return-challenged investment environment.

There are no income limitations. The New York plan allows a total investment of up to $100,000 per account and a $235,000 total-account balance limit.

The program allows the person making the contribution to retain control of the money. But if the money is withdrawn and used for something other than college expenses, it is subject to income tax and state and federal penalties currently at 20 percent.

Other states have other rules. But investors can fund plans in several states for the same beneficiary.

Hurley's book, about to go into a fourth edition, explains all that. For more information on the plans or how to purchase the book, visit his Web site www.savingforcollege.com.

Leah Powell, a Bonadio part-time worker who helped Hurley develop his Web site, sees the state 529 plan as a vehicle to avoid future college funding woes.

"We're making steps in the right direction," she said. "I wish we could say we had more put away, but we are on the right path."