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If there’s one absolute truth in investing, it’s that there is no such thing as a sure thing. However, for Indiana residents who want to help children, grandchildren or other loved ones save for college, there is the next best thing.
With costs soaring and student loans a crisis for many borrowers, paying for a college education is becoming increasingly difficult.
Enter the 529 plan, an education-savings program designed to help families set aside funds for future costs. While contributions to 529 plans are not deductible on federal tax returns, investments grow on a tax-free basis. And distributions from the plan are tax-free, as long as they pay for qualified college expenses of the beneficiary.
I am not an expert on 529 plans or taxes. Savingforcollege.com offers a wealth of comprehensive information on its website without charge. You also should consult a tax adviser. That said, I can outline the basics.
All 50 states now offer 529 plans. Participants can open an account in any state’s 529 plan. Distributions generally can be used to pay qualified college expenses, public or private, regardless of where the college is located.
A donor (typically a parent or grandparent) opens an account and names a beneficiary, the future or current college student. Funds in the account are used to pay qualified expenses of the beneficiary, but the account owner controls when withdrawals are taken and for what purpose. In most cases, the beneficiary has no rights to the funds. The account owner can even reclaim the funds (with tax and penalty), change the beneficiary, or move the investment to a different 529 plan.
While 529 plans share many characteristics and benefits, they differ from state to state as to the investment choices offered, fees, performance record and state tax benefits.
Information on the Indiana CollegeChoice 529 Plan’s three options is at www.collegechoiceplan.com. The direct plan is for the do-it-yourself investor. The adviser plan is for investors working with a financial adviser. Both are rated “Bronze Medalists” by Morningstar. The CD plan, added last year, offers FDIC-insured savings for the most volatility-averse investor.
Hoosiers can claim a 20-percent income tax credit—up to a maximum of $1,000 per return—for contributions made directly to a CollegeChoice account, whether they are the account owner or not. Make a $5,000 contribution by the end of the year and you can take a $1,000 credit on your 2012 Indiana income tax bill. On a net basis, your $5,000 contribution costs $4,000.
This is likely the closest you will ever come to a “sure thing” in investing.
You can’t start saving for college too soon, and it takes only $25 to open a CollegeChoice account. CollegeChoice’s “Ugift” feature gives account owners an easy, electronic way to suggest a milestone or holiday gift of college savings (in lieu of traditional presents) to family and friends.
You won’t find a better bargain this holiday season than giving the priceless gift of a college education—and letting Indiana pick up 20 percent of the tab.•
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Kim is the chief operating officer and chief compliance officer for Kirr Marbach & Co. LLC, an investment adviser based in Columbus, Ind. He can be reached at (812) 376-9444 or mickey@kirrmar.com.
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