Being able to help their children pay for college is a huge concern for many families. This is especially true for middle-class families and low-income families. One excellent option that can help these families save for college is a 529 tax plan.
There are two kinds of 529 tax plans to help you save for college: the prepaid tuition plan and the 529 college savings plan. Both of these plans have different uses. The college savings plan contains funds that can be invested, similar to a 401(k), whereas the funds in a prepaid tuition plan are not invested and simply go directly toward paying for college. These plans may be different in some ways but are similar in one very important way: their huge tax advantages.
Tax Benefits of 529 Plans
The big tax benefit of both 529 plans is that they offer tax-free withdrawals and tax-deferred growth. You can withdraw money from these plans at any time without facing any tax, as long as the funds go toward applicable education expenses. Additionally, investment growth in a 529 savings plan is not subject to tax.
State Benefits of 529 Plans
In addition to tax-free withdrawal and tax-deferred growth, many states offer other tax benefits for 529 plans. Most states offer a state income tax deduction for 529 plan contributions and these deductions can be huge depending on the state. For example, in Pennsylvania, up to $14,000 of 529 contributions per plan, per beneficiary, can be deducted.
Employer Matching and 529 Plans
Some businesses also stand to benefit from 529 tax credits. A few states offer employers tax incentives to contribute to their employees’ 529 plans. Notably, Nevada recently passed a law that gives employers a 25 percent tax credit on all of their matched contributions to 529 college savings plans up to $500 per employee.
The Future of 529 Tax Credits
529 plans are used by many people. By the end of 2016, there were over 11 million 529 plans in use, with a combined savings of 251.4 billion in 529 savings plans and 23.7 billion in prepaid plans.
Currently, there’s a lot of buzz about 529 plans and President Donald Trump’s potential tax cuts. Some financial experts say that 529 plan tax credits have the potential to increase under President Trump’s new tax plan. The proposed new tax plan is still undergoing revisions, with a new version released as recently as yesterday. Only time will tell what the new tax plan will yield. But, hopefully, more tax credits for 529 plans will ease the process of saving for college for many Americans.