and grandparents often turn to state 529 savings plans
to sock away money for a child’s future college costs.
But many states recently have made changes to their
programs, and with the tax filing deadline fast
approaching, savers who don’t pay attention may miss
out on the full benefits of such accounts.
contributed to a 529 (named for the section of the
federal tax code which authorizes them) is not
deductible from federal income taxes, but the investment
grows tax-deferred. There are two types of 529s: 529
savings plans, which are similar to a 401(k) plan or
Individual Retirement Account (IRA), in that a saver
invests in mutual funds or similar investments; and
prepaid plans, which allow savers to pre-pay all or part
of the costs of an in-state public college education, to
avoid future price increases. In many cases, the money
in a prepaid plan also may be used at private and
plans are operated by states or educational
institutions. They are available in all states but
Wyoming, and 30 states and the District of Columbia
allow savers to take state income-tax deductions for 529
states have annual limits on how much you can deduct,
ranging from $250 per individual tax filer in Maine to
$10,000 in Illinois. Other states limit deductible
contributions to a percentage of income, or set lifetime
contribution limits. South Carolina allows savers to
deduct the most in state income taxes over the lifetime
of the beneficiary, a total of $370,000, according to
Joe Hurley, founder of SavingForCollege.com and a
leading expert on the accounts. Three states —
Indiana, Utah, and Vermont — offer tax credits.
college costs exploding, many states are trying to
convince more people to make use of 529 plans. For
example, earlier this month Maine announced that it
would partner with the Portland-based Alfond Scholarship
Foundation to open up 529s, with initial investments of
$500 in each account, for each baby born in the state.
Colleen Quint, president and CEO of the foundation, said
the $500, which will be invested in a mutual fund, might
triple over 18 years. The foundation, which has about
$700 million in assets, expects to give the money to
about 12,000 babies annually, Quint said.
$1,500 wouldn’t go very far in paying for a private
four-year college, it would make a dent in community
college or trade school costs (at least at current
prices). In any case, Quint said, the broader goal of
the initiative is to get families thinking about saving
an opportunity for kids and their families to think
about college in some very real ways and not some
pie-in-the-sky dream," Quint said. "The $500
is seed money. It has practical as well as aspirational
this month, the Alfond Foundation gave $500 to every
family that opened a 529 account within the first year
of the baby’s birth, but the family had to act first.
A similar law in Rhode Island calls for the state to
pony up $100 for every family that opens a 529 for a
states are also moving to enhance their 529 plans,
which last year increased the maximum deduction for 529
contributions from $750 to $2,000 for individual filers
and from $1,500 to $4,000 for joint filers, effective
for the year ending Dec. 31, 2013.
which increased the deduction from $5,000 to $10,000 for
individuals and married couples filing jointly, and from
$1,500 to $5,000 for married people filing separately,
beginning in 2014;
which in 2013 removed a restriction prohibiting accounts
with the same owner and beneficiary from participating
in both of Oregon’s 529 college savings plans, one
sold directly by the state and another sold by brokers.
where the legislature approved a bill which would let
taxpayers carry a tax deduction into the next tax year.
The state limits deductions to $3,000 annually, so if a
contributor put in $4,000 into the 529 account, then
$1,000 of that deduction could be used in the next tax
year. Republican Gov. Scott Walker is expected to sign
where Democratic Gov. Steve Bullock signed a bill last
year that made taxpayers’ contributions to a
non-Montana 529 plan eligible for a state income tax
deduction. The change was effective for all of 2013.
Montana joins Arizona, Kansas, Maine, Missouri and
Pennsylvania in allowing taxpayers to take a deduction
no matter where they open a 529 account.
a competitive marketplace, so you don’t have to use
your own state’s plan," Hurley said. "Feel
free to shop around. It won’t make a difference where
your child goes to college."
Lochner, director of Washington state’s Guaranteed
Education Tuition program, said "the general rule
of thumb that we give to people when they are starting
their planning is to start with their home state plans
and see what the plans are." Lochner also chairs
the College Savings Plan Network, an affiliate of the
National Association of State Treasurers, which monitors
and tracks 529 plans in all the states.
state has different reasons for changes," she
added. "Sometimes they are trying to add more
flexibility or increase (citizens’) exposure to the
plans in some way. Sometimes it comes down to state
revenue and they are concerned about the cost of
providing those expensive tax breaks as their use is
Carolina used to offer a tax deduction for deposits into
the state’s 529 plans, but scrapped the deduction last
year as part of a broad-based tax reform plan. Savers in
North Carolina can deduct 529 contributions on their
2013 taxes, but not on their 2014 taxes or thereafter.
broad tax overhaul increased the standard deduction for
most individual filers, and that more than made up for
the elimination of the 529 tax break used by only some
filers, according to Republican state Rep. David R.
Lewis, who sponsored the tax reform bill.
the deduction for the 529 plan was eliminated, the
standard deduction that all taxpayers can claim was
increased by 240 percent," said Lewis in an
interview. "So all taxpayers benefit, instead of
the very, very small percentage that were taking
advantage of the North Carolina 529."
the number of 529 accounts opened in North Carolina
dropped dramatically in the first two months of 2014,
according to Shera Hube, vice president for marketing
for the College Foundation Inc., North Carolina’s 529
accounts established in January and February of 2013,
the last year the deduction was in place, totaled 2,475,
Hube said, while the 2014 total for the same two months
was just 1,517. And last year, "rollouts," or
people taking their money out of 529s and rolling them
into other kinds of college savings plans was 161 in
January and February of 2013, but rose to 412 for the
first two months of this year.