Saving for college? Here's good news

Each year our 529 plan saves us about $500 in taxes. Now, thanks to a new law Gov. Otter signed on March 20, that deduction will be even higher.

Let me back up. A 529 plan (named for a section of the Internal Revenue Code) is a state-sponsored college savings plan — called an “IDeal” account in Idaho — which provides federal and state tax deductions. We have one for our college-aged daughter, but it may be opened for anyone of any age, whether yourself, a grandchild, or friend. If the beneficiary doesn’t eventually attend college or technical school (anytime, anywhere in the U.S.), simply change the beneficiary.

What the code refers to as a “qualified tuition plan” allows annual state tax deductions for contributions up to a certain limit, as well as federal advantages. Earnings grow tax-deferred, and withdrawals are tax-free if spent on qualified education expenses (e.g., tuition, dorm, and books — but not loan payments). We contribute up to the maximum limit in each year, then withdraw it when tuition is due.

Until this legislative session, the deductible contribution limit was $4,000 if single or $8,000 if married filing jointly. With the new law that jumps by 50 percent to $6,000 single and $12,000 married. If that seems like a huge hike, consider that the State Board of Education estimates average college costs increased by 189 percent since the deduction began in 2000.

It’s easy to set up with as little as $25 at Idsaves.org. No initial fees, no commissions, and negligible annual cost — less than one percent of value for Idaho residents. Choose how to allocate risk; generally, the closer in time to college, the more conservative the recommended approach.

Colleges do consider the IDeal account when assessing available family resources to determine student financial need, but only minimally. Typically, only 5.64 percent of account value is assessed annually as the expected family contribution to higher education.

Money in a 529 plan is still your money; keep, spend, or close it as desired, but don’t expect any tax benefits unless it’s a qualified education expense.

“Learning is not a product of schooling but the lifelong attempt to acquire it.” — physicist Albert Einstein

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Sholeh Patrick is a columnist for the Hagadone News Network. Contact her at [email protected].