Indiana 529 plan: 5 common questions
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Indiana’s CollegeChoice 529 plan is a fantastic way to save for college expenses due to its low cost and strong investment options as well as the income tax credit received by contributors. Read on to discover frequently asked questions and answers regarding 529 plans.
As a quick refresher, a 529 plan is an investment account mainly for post-secondary education expenses. Money contributed is not deductible, but all earnings accumulate tax-deferred and are distributed tax-free if used for qualified education expenses.
What is the Tax Incentive for Contributing?
Indiana is one of the few states that offers taxpayers a tax credit for contributions to a CollegeChoice 529 plan. Currently, the credit is equal to 20% of the amount contributed during the year, up to a maximum of $1,000 for single taxpayers and those married filing jointly. However, beginning on January 1, 2023, the credit is equal to 20% of the amount contributed but increases to a maximum credit of $1,500!
Many states offer tax deductions instead of tax credits. A tax credit like Indiana provides reduces the tax that you owe. A tax deduction reduces the taxable income on which the tax is calculated.
For example, assume an Indiana resident makes a $5,000 contribution to a College Choice 529 plan. The taxpayer receives a $1,000 credit on taxes owed. If, instead, a tax deduction of $5,000 was received, at a 5% tax rate, the reduction to taxes owed would only be $250 ($5,000 times 5% = $250). Because Indiana gives a credit instead of a deduction, an additional benefit of $750 is received.
Regardless of who owns the account, any Indiana taxpayer contributing to an Indiana 529 plan is eligible to receive the tax credit. For example, assume a parent establishes an Indiana 529 account for their child and makes a contribution. Then, if an aunt also contributes to the same account, both the aunt and parent will receive a tax credit for their respective contributions.
Does the Beneficiary Need to Live in Indiana? Need to Attend an Indiana College?
An Indiana CollegeChoice 529 plan can be established for a beneficiary living outside Indiana. This means that a grandparent could set up an account for a grandson/granddaughter who lives in another state. Since the grandparent lives in Indiana, they can contribute to the plan and receive the Indiana tax credit.
The beneficiary of an Indiana 529 account can attend any accredited college or university anywhere in the country. The 529 plan is also available for costs relating to post-secondary education, including vocational or professional schools.
Does Ownership Matter?
The owner of the 529 plan makes all decisions regarding the account and maintains control of the funds. For example, the owner makes investment selections, approves distributions from the account, and can change the beneficiary to another family member.
Ownership does matter from a financial aid perspective. When a parent owns a 529 plan, the asset reduces aid eligibility by a maximum of 5.64% of the account value. When a grandparent (or other non-parent family member) owns a 529 plan, the asset value is not reported on FAFSA. However, distributions from the account need to be reported as student income. Student income can reduce aid eligibility by as much as 50% of the distribution. Therefore, under current rules, parent-owned 529 plans are typically more advantageous.
However, the Department of Education introduced changes to the FAFSA form for future years which changes reporting of grandparent-owned 529 plan distributions. Under the new rules, FAFSA does not require students to report cash support or distributions from 529 plans. This means grandparent-owned 529 plans could be more advantageous from a financial aid perspective beginning in the 2024-2025 school year.
What is a Qualified Education Expense?
A qualified education expense includes: tuition, computers, mandatory fees, books, required supplies and equipment, and room and board costs on and off-campus. In addition to using 529 distributions for higher education, distributions can also be made for K-12 tuition payments. However, K-12 distributions are limited to $10,000 per year. Distributions for student loan payments up to a $10,000 lifetime limit are also permitted.
What Happens to Unused Funds?
Options for unused funds in a 529 plan include keeping the funds within the account in case the beneficiary attends school later. Another option is changing the beneficiary to an eligible member of the beneficiary’s family (including a child or step-child, sibling, parent or stepparent, grandparent, grandchild, niece or nephew, aunt or uncle, first cousin, spouse, or mother- or father-in-law, son- or daughter-in-law, brother- or sister-in-law).
Withdrawing the funds for a purpose other than qualified education expenses is another alternative. When distributing funds for a purpose other than qualified education expenses, the portion of the distribution that consists of earnings are subject to federal and state taxes, along with a 10% penalty. However, the principal portion is distributed tax and penalty-free.
Summary
If you are an Indiana resident, the best place to save money for your student’s education expenses is with the Indiana 529 plan, referred to as CollegeChoice. For further information, visit the Indiana 529 plan’s website at www.collegechoicedirect.com.
Abby VanDerHeyden, CFP, is a Wealth Advisor with Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.bedelfinancial.com or email Abby at AVanDerHeyden@bedelfinancial.com.