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How to maximize college savings

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The IRS doesn't have a cap for contributions to a 529 plan, but state contribution limits range from $235,000 to $529,000 per beneficiary.

 

Choosing a 529 plan

Choosing a 529 plan can seem complicated. After all, you can enroll in a program operated by your state or by another state.

For some parents, state income tax benefits are a big factor in whether they invest in their in-state plan or go elsewhere.

To make the decision easier, Morningstar groups states into five categories:10

1. States with a tax deduction. Twenty-three states and the District of Columbia allow residents to subtract all or a part of their in-state 529 plan contributions from their taxable income. To illustrate, Alabama gives married couples a deduction of up to $10,000 per year for in-state 529 plan contributions.5 A married couple with $200,000 in taxable income could contribute $10,000 to a 529 plan, leaving $190,000 of their income subject to state income taxes.

2. States with a tax credit. Utah, Indiana, and Vermont give residents a dollar-for-dollar reduction in their tax bill, up to a limit, for contributions to an in-state plan. For example, Indiana allows a 20% tax credit on up to $5,000 per year in contributions.5 Thus, a $5,000 contribution in Indiana would lower your tax bill by $1,000.

3. No income tax. Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming don't have a state income tax. Contributing to a 529 plan doesn't generate any state income tax breaks for residents in those states.

4. Tax parity. Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana, and Pennsylvania offer tax breaks to their residents for contributing to a plan in any state, not just their home state.

5. No benefit. California, Delaware, Hawaii, Kentucky, Maine, New Jersey, and North Carolina don't offer tax deductions or credits for any 529 plan contributions.

If your state's tax benefits are greater than the additional fees for your state-sponsored plan (compared to a plan you're considering in another state), you could benefit from staying in-state. Otherwise, you may want to look around for a plan that offers more investment options or lower fees.

In some cases, families might consider opening more than one account for the same child. A child can be a beneficiary of multiple 529 plan accounts.11 In fact, if both parents and grandparents want to contribute to the account, and they live in different states, the family might consider setting up plans in different states to maximize tax breaks in each state.

Having plans in two different states can also allow you to save more. Each state's contribution limit applies to the balance of all 529 plans administered by that state for the same beneficiary. For example, if a family has already maxed out the $350,000 contribution limit for one child in Tennessee, they can open a new account in South Carolina and contribute up to the $482,000 limit in that state.5

Once you pick a plan, opening the account is usually a pretty simple process. If you need help making sense of different plans or opening a 529 plan account, Synovus can help. Give us a call at 1-888-SYNOVUS (1-888-796-6887) to start the college savings conversation.

Important disclosure information

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

  1. Sallie Mae, “How America Pays for College 2020," accessed August 4, 2020. Back
  2. College Board, “Trends in College Pricing 2019," accessed August 4, 2020. Back
  3. IRS.gov, “Tax Benefits for Education," issued January 17, 2020, accessed August 4, 2020. Back
  4. CalcXML.com, "What are the advantages of a 529 college savings plan?" accessed August 12, 2020. Back
  5. SavingforCollege.com, “State tax deduction or credit for contributions," accessed August 4, 2020. Back
  6. SavingforCollege.com, “Maximum 529 Plan Contribution Limits by State," accessed August 5, 2020. Back
  7. IRS.gov, “Frequently Asked Questions on Gift Taxes," updated July 31, 2020, accessed August 5, 2020. Back
  8. IRS.gov, “Form 709," accessed August 5, 2020. Back
  9. SavingforCollege.com, “10 Rules for Superfunding a 529 Plan," accessed August 5, 2020. Back
  10. Morningstar, “How Do I Choose a 529?" accessed August 5, 2020. Back
  11. SavingforCollege.com, “Maximum 529 Plan Contribution Limits by State," accessed August 5, 2020. Back