ASK KIM
A 529 Has International Appeal
by Kimberly Lankford

I'd like to start saving for my 5-year-old's education but we don't know where we're going to be living in 12 years. I'm from the UK, my wife is from Australia and our son was born in Texas. I'm thinking about putting money into a 529. I'd like to have the flexibility of being able to send my son to college in the U.S., UK or Australia. Would the funds be available without penalty to pay for an overseas education?

Yes, you can use money from a 529 college-savings plan or Coverdell education-savings account at hundreds of foreign colleges, but you or your wife must be a resident alien or U.S. citizen to participate in a Coverdell and many 529 plans.

According to the IRS, you are a resident if you have received an alien registration card and have been a permanent resident of the United States at any time during the calendar year. This is known as the "Green Card test."

You may also be considered a resident if you pass the "substantial presence test." To meet this test you must live in the U.S. for at least 31 days during the current year and 183 days over the past three years.

For more information, see IRS Publication 519, U.S. Tax Guide for Aliens.

You can use 529 and Coverdell funds at universities in England including Oxford, Cambridge and the London School of Economics. Money from these college savings vehicles can also be used in Australia at the University of New South Wales and the University of Sydney. To see which schools qualify for tax-free 529 and ESA withdrawals and accept U.S. federal financial aid, check out the Department of Education's federal school code search.

"The 529 withdrawals are tax-free for expenses at many institutions around the world, so the location of the school ultimately attended may not be a big factor at this point," says Joe Hurley of Savingforcollege.com.

If you want to save for your child's education using U.S. investments, then a 529 or Coverdell would be a good way to achieve tax-favored growth.

Before selecting which 529 to use, contact the plan administrators and make sure that resident aliens are eligible to open an account. And, if you plan on moving out of the U.S., find out if nonresident aliens can continue to contribute. Also keep on ear open for U.S. tax law changes. The tax-free status of qualified 529 withdrawals disappears in 2010 unless Congress extends the tax break.