Costs are skyrocketing and college affordability is a national crisis. This holiday season, give the gift of a college education by establishing or making a gift to a young person’s 529 College Savings Plan account. Not only is it a gift that will last a lifetime, but if you’re an Indiana resident, the state will also reward you with an extremely generous tax incentive.
529 Plans help families invest to pay future college costs. Contributions to 529 Plans are not deductible on your federal tax return, but your investment grows on a tax-free basis. Distributions are tax-free, as long as they pay for qualified education expenses of the beneficiary, regardless of whether the college is public or private or where it is located.
Both savingforcollege.com and collegesavings.org offer a wealth of free, comprehensive information on 529 Plans. You should also consult your tax adviser.
The account owner opens an account and names a beneficiary (the future college student). Funds in the account are used to pay qualified expenses of the beneficiary, but the owner controls when withdrawals are taken and for what purpose. The beneficiary generally has no rights to the funds. The owner can even reclaim the funds (with tax and penalty) or change the beneficiary.
Every state (except Wyoming) offers a 529 Plan, open to residents of any state. While 529 Plans share many characteristics, they differ as to the investment choices offered, fees, performance and state tax benefits.
Information on Indiana’s CollegeChoice 529 Savings Plans is located at college choiceplan.com. The Direct Plan is for do-it-yourselfers, while the Advisor Plan is offered by financial advisors. In 2016, Morningstar identified both Indiana plans among “best in class” options and awarded them its “Bronze” rating.
Morningstar’s Christine Benz says, “the Indiana 529 Plans’ lineups are sensibly structured and Indiana’s tax credit is among the most generous in the country.”
Hoosiers can claim a 20-percent income tax credit — up to a maximum of $1,000 per return each year — for contributions made directly to a CollegeChoice account, whether they are the account owner or not. Make a $5,000 contribution received by Dec. 31, 2016 and you can take a $1,000 credit on your 2016 Indiana income tax bill. On a net basis, each dollar contributed costs you only 80 cents, representing a risk-free 25 percent return on your investment.
According to Troy Montigny, executive director of the Indiana Education Savings Authority, “Every bit saved now makes a big difference later. With low minimum contributions of $10 and arguably the best tax incentive in the country, it’s never too early or too late for Hoosiers to save for education expenses through the CollegeChoice Plans.”
Ugift (www.ugift529.com) is an easy, free-to-use service that lets account owners suggest that family and friends celebrate children’s milestones with the gift of college savings in lieu of traditional gifts.
The Private College 529 Plan (www.privatecollege529.com) is owned by 284 member colleges nationwide — 12 in Indiana. It is a prepaid tuition plan (minimum initial contribution $25). Participants purchase Tuition Certificates at current tuition rates, to be redeemed for education years down the road at any member college. Importantly, the colleges bear the market risk and you do not have to commit to a particular college until you actually enroll and redeem your certificates.
Mickey Kim is the chief operating officer and chief compliance officer for Columbus-based investment adviser Kirr Marbach & Co. Kim also writes for the Indianapolis Business Journal. He can be reached at 812-376-9444 or email@example.com.