Opinion and Investing Column

KIM: Tax credit gives Hoosiers edge in saving for college

November 12, 2011

KimIf there’s one absolute truth in investing, it’s that there is no such thing as a sure thing. However, for Indiana residents with loved ones who are either in college or someday will be, there is the next best thing.

Higher education is critically important. A college degree obviously doesn’t guarantee a high-paying, satisfying job. However, in today’s ultra-competitive job market, it can certainly give a candidate an edge. Unfortunately, with college costs escalating rapidly, paying for it is becoming more difficult.

Enter the “529 plan,” a tool designed to help families set aside funds for future college costs. It is named for Section 529 of the Internal Revenue Code, which created the savings plan in 1996. Although contributions to 529 plans are not deductible on federal tax returns, the investment compounds on a tax-free basis. And eventual distributions from the plan are not subject to federal taxes, as long as they are used for qualified college expenses of the beneficiary.

In the interest of full disclosure, I am not an expert on 529 plans or taxes. Everyone’s tax situation is different, so consult a tax adviser. But as a starting point, I think the best, most comprehensive information on 529 plans can be found on Joseph Hurley’s website: www.savingforcollege.com.

All 50 states offer 529 plans, and residents can open an account in any of them. Distributions generally can be used to pay qualified college expenses wherever the school is located.

The donor (typically a parent/grandparent) establishes an account and names a beneficiary (the future or current college student). Though the funds in the account are intended to pay the beneficiary’s education expenses, the donor retains control over the account and determines when withdrawals are taken and for what purpose. With few exceptions, the beneficiary has no rights to the funds. The donor can even reclaim the funds (with tax and penalty), change the beneficiary at will, and move the investment to a different 529 plan.

While 529 plans share many characteristics from state to state, they differ in fees, investment choices, performance records and state income tax benefits.

Indiana’s 529 college savings plans go by the name of CollegeChoice. Complete information on investment options and rules are available at www.collegechoiceplan.com, but there are two primary options: the CollegeChoice 529 Direct Savings Plan, for the do-it-yourself investor, and the CollegeChoice Advisor 529 Savings Plan for those who have professional help.

Hoosiers can claim a 20-percent income tax credit—up to $1,000—for contributions made to an Indiana 529 plan. So Indiana residents who put $5,000 into one of the savings accounts by the end of the year can take a $1,000 credit on their 2011 state income tax bill. On a net basis, that $5,000 investment cost only $4,000.

And that likely is the closest anyone will come to a “sure thing” in investing.

You can’t start saving for college too soon and it takes only $25 to open an account in Indiana’s CollegeChoice 529 Plan. There may be a $5 or $1,000 bill lying on the sidewalk, but it’s up to you to pick it up. Santa should keep these thoughts in mind when he’s making his list and checking it twice.•

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Kim is the chief operating officer and chief compliance officer for Kirr Marbach & Co. LLC, an investment adviser based in Columbus, Ind. He can be reached at (812) 376-9444 or mickey@kirrmar.com.

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