Why is Saving So Complicated for College? There are several types of college savings plans, including 529 college savings plans, prepaid study plans, Coverdell Education savings accounts, and child savings accounts (CSA). There are also savings accounts outside of education, e.g. B. a Roth IRA.
Choosing among the many options presents parents with a difficult choice. In general, 529 college savings plans offer the best mix of tax, grant, and estate planning benefits. But even 529 plans are complicated. Almost every state has its own plan. And there are many differences in the 529 plans offered by each state.
Although the broad lines of 529 college savings plans are defined in Section 529 of the 1986 Internal Revenue Code, some states do not adhere to all of the details of federal law. Even if a state meets federal requirements, the state may have additional characteristics that are not set out in federal law.
Differences in State Income Tax Treatment
The IRS rules set the requirements for favorable tax and financial treatment of 529 college savings plans. These rules cannot specify the details of the treatment of 529 plans by state taxes and grants.
Many states offer citizens special benefits when they invest in the state’s own 529 plans. They also provide penalties for transferring the investment to a non-government 529 plan.
Two-thirds of states grant a state income tax deduction or state income tax credit based on contributions to the state’s 529 plan. Seven of these states provide the state tax break for contributions to a state’s 529 plan.
The limits of these state tax breaks vary from state to state. Not only do the contribution limits differ, but some states set the limit per beneficiary and some per taxpayer. Excess contributions can be carried forward for a different number of years. Some states allow an inbound rollover from an out-of-state 529 plan to qualify for the state income tax break. Others, however, only limit the tax break to the main part of the rollovers.
Once the money is deposited into the state’s 529 plan, many states don’t want the money to leave the plan. They have policies in place to prevent outbound rollover to an out-of-state 529 plan. Some consider an outbound rollover to be an unqualified distribution for state income tax purposes. Not only is the rollover subject to state income tax, but some states also impose a tax penalty. There may also be a re-entry of government income tax breaks due to the rollover.
Differences in the definition of qualified expenditure
The law to protect Americans from tax increases (PATH Act) added the definition of qualifying expenses to the purchase of a computer, peripherals, Internet access and computer software, effective January 1, 2015.
The 2017 Tax Cut and Employment Act increased tuition fees in elementary and secondary schools to $ 10,000 per year effective January 1, 2018. The law also provides that 529 plans can be transferred to an ABLE account for a special needs beneficiary.
The SECURE Act of 2019 allows the use of 529 tax-free repayment plans of up to $ 10,000 in student loans per borrower starting Jan. 1, 2019. The SECURE Act also allows 529 plans to to bear the cost of apprenticeship programs such as fees, textbooks, supplies and equipment.
Some states automatically adapt to changes in the federal definition of qualified expenditure, while others do not. The states that do not comply will have to pass laws to update their definitions. This has caused many differences in the definition of qualified expenditure in 529 plans.
Some states do not allow K-12 tuition, student loan repayment, and apprenticeship programs as qualified expenses. Others selectively decide which changes to accept. Some added K-12 tuition as a Qualified Edition, but no student loan repayment. Others limit K-12 instruction to state schools only.
Differences in the contributions
The total contribution limits vary depending on the federal state, but are large enough for most families. The minimum contributions also vary depending on the plan. Some allow minimum contributions of as little as $ 15 or $ 25; others require a minimum contribution of hundreds or thousands of dollars.
Some states are providing seed funding for 529 newborn and newly adopted child plans. This is motivated by research showing that even a small 529 plan account can have a huge impact on college enrollment and graduation. The entry fee for a new account can be $ 25, $ 50, $ 100, or $ 200, depending on the state.
Some states will adjust contributions for low-income families. The number of matches can be limited. In other states, the family must set up automatic contribution funding to qualify for the game. Certain states offer a bonus when the money is used to pay for college. Gift platforms vary by state.
Differences in cost and performance
Perhaps the most important differences among 529 plans are related to cost and performance. Some states have higher asset-based expense ratios than others. Competition lowers costs in several states.
Directly sold 529 plans do not charge commissions, but some plans sold by consultants do. Minimizing costs is key to maximizing net return.
The return on investment may vary depending on the investment options offered in each country. Some of the most common differences in investment options are:
When considering the tradeoff between lower fees in a non-state 529 plan and state income tax breaks for a state 529 plan, focus on lower fees when the child is young and state tax breaks when the child is in high school is.
Some state 529 plans are only open to citizens, while others are marketed nationwide.
Some states will exclude money in an in-state 529 plan from being eligible for state grant funding. Others make a student eligible for state tuition if they have invested in a state 529 plan, even if they no longer live in the state.
Although all 529 plans allow beneficiary changes for a family member of the current beneficiary, changes to the account holder are much more restrictive. Some only allow the account holder to be changed if the current account holder dies. Others allow changes if the parents divorce. Some charge a change of account holder fee and some do not.
Most 529 plans offer online access. However, in three cases families cannot complete the registration process online. There may also be differences in the type of information available online and the number of actions available.