Indiana’s 529 Plan Ranks 3rd In The Nation
Savingforcollege.com recently announced the Top Ten Direct-Sold 529 Plans in the country based on 3-year performance. Indiana’s CollegeChoice 529 Direct Savings Plan ranks number three with a “Performance Score” of 31.07 out of 100 (1 is the best). Ohio’s 529 Plan, CollegeAdvantage, ranked second with a Performance Score of 29.35. West Virginia SMART529 WV Direct College Savings Plan (available to West Virginia residents only) ranked first with a score of 27.90. Each state's 529 savings programs are assessed on the reported investment performance of a subset of portfolios to determine the Performance Score. Click here to see the complete methodology of how the plans are ranked.
Indiana Tax Credit
Any Indiana taxpayer who expects to pay for education expenses in the future should consider opening a 529 plan. To encourage you to contribute to an Indiana CollegeChoice 529 Education Savings Plan, the State of Indiana will give you a current year tax credit for contributions made by December 31.
The amount of the credit is 20% of the combined contributions to one or more Indiana CollegeChoice 529 Education Savings Plan accounts during the tax year. The amount of the taxpayer’s adjusted gross income tax liability for the taxable year is reduced by the amount of the credit, up to $1,000. The credit will not offset any federal or county tax liability. Note, if your filing status is married filing separately, your maximum credit is $500.
Last year (2020), “Linda,” an Indiana resident, set up an Indiana CollegeChoice 529 Education Savings Plan for her son, “Timmy” and contributed $5,000 to his 529 plan. Her total Indiana tax liability for 2020 was $2,000. She made prior tax payments via paycheck withholding of $2,000, so she is entitled to a $1,000 529 Plan Credit. When she filed her income tax return in 2021, $1,000 of the 529 Plan Credit was applied against Linda’s $2,000 tax liability to reducing this tax liability to $1,000. Linda overpaid her 2020 taxes by $1,000 and was entitled to a $1,000 refund.
What If Your Tax Liability Is Lower Than $1,000?
Linda’s mother, “Sally” also an Indiana taxpayer, set up an Indiana 529 plan for Timmy in 2020 as well. Sally contributed $5,000, but her total Indiana tax liability in 2020 was only $500. When Sally filed her income tax return in 2021, $1,000 of the 529 Plan Credit was applied against Linda’s $500 tax liability to reducing this tax liability to $0. The remaining $500 of the 529 Plan Credit is not usable. Sally could not carryback, carryforward, nor receive a refund for any of the unused 529 credit. If Sally expects her 2021 Indiana tax liability to be the same as 2020, she only has to contribute $2,500 to one or more Indiana 529 plans to receive the same $500 tax credit.
Growth of 529 Plans In Indiana
In March 2021, Indiana State Treasurer, Kelly Mitchell announced that assets in the state’s CollegeChoice 529 Plans have more than doubled since 2014. The value of Indiana’s education savings plans now exceeds $6.2 billion.
The number of CollegeChoice 529 accounts has also grown, now surpassing 400,000 currently open in Indiana. The average account balance is $15,000, which is approximately 40% of the average in-state tuition bill for a 4-year degree in Indiana, according to the research and analysis company, ValuePenguin.
When I Take Money Out, Do I Need To Return The Tax Credit?
One of the frequently asked questions about 529 plans is about nonqualified expenses. If an Indiana taxpayer uses funds from an Indiana CollegeChoice 529 Plan for nonqualified expenses, those distributions are subject to an Indiana tax credit recapture. In addition to the income taxes and 10% penalty, you must repay all or part of the tax credit during the same year you make the nonqualified withdrawal.
According to Schedule IN-CR a qualified withdrawal is defined as "a withdrawal or distribution from a CollegeChoice 529 education savings plan account that is made:
- to pay for qualified higher education expenses;
- because of the death or disability of an account beneficiary;
- because an account beneficiary received a scholarship that paid all or part of their qualified higher education expense;
- because of a transfer of funds by the plan from one third party custodian to another."
In addition, the Indiana Department of Revenue's Information Bulletin #98 Income Tax May 2020 announced that "the following withdrawals are not considered qualified withdrawals for purposes of recapturing previously-claimed credits:
- A distribution or transfer from the Indiana CollegeChoice 529 Education Savings Plan to an Achieving a Better Life Experience (ABLE) account.
- Amounts used to pay for tuition used to pay for tuition at an out-of-state K-12 school.
- Effective January 1, 2020, a withdrawal used to pay student loans incurred to pay higher education expenses, as otherwise permitted under IRC § 529(c)(9). This is because such payments have been defined to not be “qualified higher education expenses” under IC 6-3-3-12(g)."
If you want to take a 529 distribution for anything other than qualified expenses, consider consulting with a tax professional or financial advisor first. Discuss alternatives that might not subject you to taxes and penalties.
To learn more about CollegeChoice 529 Plans, contact us at 866-333-4726, or visit www.collegechoicedirect.com. To read the Program Description and learn how your contributions will be invested in your Indiana CollegeChoice 529 Plan, click here. Planning and saving for college is simple once you get started. The team at Hurlow Wealth Management is here to help. For nearly three decades, we have helped clients find clarity, feel confident, and achieve comfort in saving for college and beyond. Schedule a FREE consultation today.