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  • Writer's picture Treavor Dodsworth CFP®, CPA, CKA®

#93 - To 529 or Not 529 - Part 3

To 529 or Not 529 - Part 3

This is the last post in a series on 529 accounts.

In the first post, we discussed how you can use variables specific to your situation to determine whether a 529 is a useful savings vehicle. In the second post, we discussed the flexibility of a 529 and some less common uses. Today, I wanted to explain how a 529 can be used to generate current tax savings even if you are not investing in the account at all.

Given that a 529 could be used for qualifying expenses all the way from Kindergarten through graduate school (and even beyond), there is the possibility that a student may have eligible expenses for close to 20 years.

In Indiana, there is a 20% state tax credit on contributions up to $5,000 to the Indiana CollegeChoice 529 Education Savings Plan ($1,000 max tax credit). Instead of just paying for these 20 years of expenses directly, if you used the 529 you could potentially save $20,000 ($1,000 per year) in state taxes by putting $5,000 into the 529 and then using that 529 contribution for eligible expenses.

Indiana does have one of the, if not the, best 529 state tax benefits therefore depending on your state it may or may not be worth pursuing. Also, you will want to make sure there are no specific state laws that would prohibit this. For example, in Indiana, if the 529 account is closed within 12 months after opening the tax credit may have to be repaid. You can read more about Indiana's 529 laws here. You should also evaluate the impact on financial aid and scholarships if any.

Any time you are paying any expense that you think there is the remote possibility of it being a 529 eligible expense you should review and determine if it is financially beneficial to pay through the 529 instead.


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