529 Plans: The Unsung Heroes of Financial Aid
There is a slight crispness to the evening air, the local goose population is shrinking by the day as they head south, and from my office I can hear students excitedly hurrying up and down the stairs on their way to class — another semester is officially in full swing!
If you are a current college student, you have already completed the FAFSA (Free Application for Federal Student Aid), considered your federal loans, and accepted your student aid in preparation for this academic year. Now that classes have begun, you may assume that there is nothing more that can be done to maximize your savings for this academic year, but you would be wrong in that assumption. Allow me to introduce you to the 529 plan! Although a 529 plan does not receive the media attention of student aid and federal loans, it is aa valuable tool in a savvy student’s arsenal.
A 529 plan is an investment account that offers tax benefits when used to pay for certain expenses. Any individual with a tax ID (like a Social Security or other recognized number) is eligible to open an account, the funds are tax-free if the money stays in the account until it is withdrawn for qualified educational expenses, and the plan is flexible, since it can be used for K-12 expenses, college expenses, and even student loan repayment.
You can have your own 529 plan, or others can sponsor a plan on your behalf. A 529 plan allows the account owner to keep control of the account until the money is withdrawn, so anyone who wants to save for a child’s education should consider opening one. Students could have multiple plans sponsored by parents, grandparents, and themselves, and each plan owner will receive the tax benefits of their plan. It's a wonderful way to support a student financially while also reaping the tax benefits of your contribution.
In addition to federal tax benefits, many states offer tax incentives for those who take part in a 529 plan. For example, in Indiana, residents who open and place funds in a 529 plan receive a state income tax credit that equals 20% of their contribution, up to $1,000 per year.
This means that for Indiana residents, it is not too late to open a 529 account, deposit funds, and receive a tax credit for the 2022 tax year. Funds deposited could be withdrawn for the spring semester. If you plan to pay $5,000 or more for the upcoming spring semester, why not add those funds to a 529 plan in 2022, receive a $1,000 tax credit for the 2022 tax year, and use the $5,000 you deposited into the 529 plan to pay your bill?
The icing on the cake is that you just received an extra $1,000 for a payment you were already planning to make!
Indiana is not the only state to offer tax incentives. Arizona, Arkansas, Connecticut, Georgia, Colorado, Michigan, Ohio, Pennsylvania, and many other states also offer tax incentives for those who choose to take part in a 529 plan.
Research 529 plans and your state of residence online to find out more!
