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Planning for the College EducationThe nation’s most popular college savings plan is about to become even more so. The popularity of the 529 college savings plan is likely to increase because the new federal tax legislation expands the ways that the accounts may be used.

Starting in 2018, parents may spend up to $10,000 a year from 529 accounts to pay for private education in kindergarten through 12th grade schools. Until this year, 529 college savings distributions could only be used for qualified college expenses without triggering taxes and a withdrawal penalty.

Using a 529 savings account to pay for pre-college educational expenses can offer a number of tax benefits.  The money in the account grows tax-free and when the withdrawals are used for qualified educational expenses no tax is owed. In addition, several states offer tax deductions or tax credits for contributions to 529 accounts.

Roughly three dozen states provide tax breaks to individuals who contribute to their own state’s 529 plans. The tax benefits range from a few hundred dollars up to the full amount of an individual’s annual 529 contributions.

The following states, according to SavingforCollege.com, provide among the best tax breaks for 529 contributions:

  • Arkansas

  • Idaho

  • Indiana

  • Iowa

  • Missouri

  • Montana

  • Nebraska

  • New York

  • Oregon

  • South Carolina

  • Vermont

  • Virginia

  • West Virginia

  • Wisconsin

A handful of states give residents a state tax deduction even if they invest in an out-of-state 529 plan. Here are the six states in this category:

  • Arizona

  • Kansas

  • Minnesota

  • Missouri

  • Montana

  • Pennsylvania

In contrast, the following seven states, which impose state income taxes, do not provide any tax benefit for 529 contributions:

  • California

  • Delaware

  • Hawaii

  • Kentucky

  • Maine

  • New Jersey

  • North Carolina

The expanded 529 plan could become especially popular in blue states since the new tax legislation has imposed limits on residents’ ability to deduct state and local taxes.

Some state plans allow 529 account owners to deposit money into their college savings plans for just a day and still pocket a state tax break. Before attempting this, you should check with your 529 provider to see if there is a waiting period for contributions to qualify for a tax break.

Parents who want to pay for pre-college educational expenses may want to create a separate account. That way one 529 account can be devoted strictly to saving for the eventual college tab.

 

Learn more:

Will Saving for College Hurt Your Financial Aid Chances?

Are Students Borrowing Blindly for College?

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