Have you thought about how you are going to save for your children’s education? There are many available options, but the most well known college savings program is the 529 savings plan. This type of plan has been around since 1996 and is very popular for two main reasons:
Contributions to 529 savings plans don’t have restrictions on them such as adjusted gross income limitations. Plus they are controlled by the custodian of the account to ensure the funds are used by the beneficiary for educational purposes. A custodian of the account can be a parent, aunt or uncle, or even a generous grandparent, but ultimately does not have to be related to the beneficiary. Custodians are also allowed to establish as many accounts as they want.
Any income earned within the account is tax free as long as it is used for educational purposes like tuition, room and board, fees, books, supplies, and equipment (including computers if needed for enrollment or attendance at a qualified institution).
The income tax benefit to this type of plan (besides tax-free earnings) is the potential to reduce your taxable income on your state tax return by subtracting the amount of your contribution. For instance, with the Colorado income tax rate at 4.63%, a contribution of $25,000 could save you almost $1,200 in Colorado taxes!
Things to remember when using a 529 savings plan as a Colorado state tax savings tool:
There is no limit to the amount you can contribute to an account, but Colorado may restrict how much of your contributions you can deduct on your state taxes.
The money can be contributed to and withdrawn immediately from an account while still reducing your Colorado taxable income. For example, let’s say parents of a college student need to make a tuition payment in January. If they deposit the money in December, they can trigger the deduction then withdraw the funds right away after the first of the year.
Colorado requires 529 plans be administered by CollegeInvest for the deduction to be allowed. Contributions to other various state 529 saving programs will not qualify for the Colorado Tuition Program Contribution Subtraction.
Please contact us if you would like to know more or to discuss how a 529 savings plan could benefit both you and your student.