As children grow, so does the cost of raising them. One of the biggest challenges parents face today is the cost of higher education. Depending on the institution and the student’s course of study, higher education costs can exceed the price of a family’s home. Despite these challenges, tools and options are available to help families save for higher education.
In 1986, the IRS created 529 savings plans to help families cope with the financial burden of higher education. Individuals can set aside money today and invest it in various plans to fund future expenses with tax-free earnings. Beyond tuition, 529 accounts can help pay for room and board, textbooks, computers and other education expenses.
The state of Indiana made a good deal even better with the introduction of Indiana College Choice 529. Under the Indiana College Choice program, a donor gets the benefits of a federal 529 account, but also receives a tax credit. The credit is equal to 20% of the gift, up to $5,000. Thus, Indiana state residents may receive up to $1,000 annually as a tax credit through Indiana College Choice.
The tax credit for 529 contributions is available even if a child is already in enrolled in a university. Assuming the funds are available, individuals can make both deposits and withdrawals in the same year and receive the tax credit. The downside is the money must be used for a qualified expense. Earnings on withdrawals not used for qualified expenses are subject to a 10% tax penalty.
Account owners can name anyone in their bloodline as the beneficiary. Additionally, the beneficiary may be changed at any time. Because 529 accounts are held in the owner’s name rather than the student’s name, the impact on a student’s financial aid eligibility is limited. Individuals can contribute up to $14,000 annually per beneficiary. Married tax filers can contribute up to $28,000 per beneficiary each year. An exception in the rules even allows for five years’ of contributions to be donated at a single time.
Indiana College Choice is only one option available to help fund higher education costs. However, Indiana College Choice is the only 529 account that provides a tax credit. Remember that the tax credit is only helpful if an individual owes at least $1,000 in state income taxes.
Contributions for the tax credit are limited by the taxpayer’s return. A parent and a grandparent can both make contributions in the same year and receive a tax credit. Many opportunities for tax savings get missed because people overlook the opportunity or don't take time to plan. Contributions must be made in a calendar year. Tax credits are limited to $1,000 per year.
The investment choices are simple in the state plan. Though I tend not to be a fan of target-dated funds, the 529 is an instance where target-dated options make sense. Parents can target the years they expect money will be needed for higher education costs and begin planning for their child’s future.
Tax advice provided by CPA’s affiliated with Financial Enhancement Group, LLC.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.
