How to Reach Your College Savings Goals with a 529 Plan

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By Mark Kantrowitz

September 4, 2020

During our webinar about How to Reach Your College Savings Goals with a 529 Plan, participants asked dozens of questions. Here are the answers to questions about reporting 529 plan contributions on state income tax returns, FDIC-insured investment options, whether foreign colleges and universities are eligible, the impact of college savings on financial aid, and political risk to the future of 529 plans. 

How to Report 529 Plan Contributions on State Income Tax Returns

I live in Washington, DC and have had a hard time getting an answer from the DC taxation office on the following question: Do state tax deductions for 529 contributions count in addition to the standard deduction, or do you have to itemize your total state tax deductions to deduct 529 contributions?

Generally, state income tax deductions for contributions to a 529 college savings plan are in addition to the standard deduction. Itemization is not required.

State income tax deductions for contributions to the state’s 529 plan are usually implemented as a subtraction from federal adjusted gross income. You can claim the state income tax deduction even if you claim the standard deduction on your income tax returns.

If the state department of revenue web site does not have specific information about how to claim the state income tax break for contributions to the state’s 529 plan, look at the instructions for the state income tax return and the form’s schedules. There is usually a separate line item for reporting the contributions. 

In Washington, DC, contributions to the DC College Savings Plan are reported on Line 6 of Calculation B on Schedule I. The total of the subtractions on Schedule I, from Line 16 of Calculation B, is then reported on Line 13 of the D-40 income tax return form. 

Questions about FDIC-Insured Investment Options

Is there a way to find the state 529 plans that offer FDIC-insured investment options?

Savingforcollege.com publishes a list of the 18 state 529 plans that offer FDIC-insured investment options. An additional state offers an investment option that is insured by the National Credit Union Administration (NCUA). 

Some of these plans offer certificates of deposit (CDs), while others offer federally-insured savings accounts. These are good options for investors who are risk-averse. 

Yields do not keep pace with consumer and college tuition inflation rates. Nevertheless, they may be a good option for the low-risk portion of an investment portfolio. 

Aren’t all 529 plans FDIC-insured?

No. Most portfolios in 529 college savings plans invest in stocks and bonds. These portfolios may lose value.

More than a third of the state 529 plans offer FDIC-insured investing options, as an alternative to putting low-risk money in cash and money market accounts. 

Questions about Eligible Colleges and Universities

From online, I get confused answers. Can I use 529 fund for my kids to go to Canadian colleges?

529 plans may be used to pay for qualified higher education expenses at more than 400 foreign colleges and universities, including 69 Canadian colleges and universities. For example, 529 plans can be used to pay for college costs at University of Toronto, University of British Columbia, McGill University, Dalhousie University and Simon Fraser University. Check whether your college qualifies using our searchable list of eligible institutions.

Questions about the Impact of College Savings on Financial Aid

Are grandparent UGMA accounts reported on the FAFSA?

An UGMA or UTMA account is an asset of the child, not the custodian. So, an UGMA or UTMA account established by a grandparent for a grandchild must be reported as a student asset on the student’s FAFSA. This will reduce eligibility for need-based financial aid by 20% of the asset value.

Custodial 529 plan accounts and parent-owned 529 plan accounts are reported as a parent asset on the FAFSA. This reduces aid eligibility by at most 5.64% of the asset value.

Questions about Political Risk to the Future of 529 Plans

What happens if 529 plans are scrapped?

Congress is extremely unlike to repeal 529 college savings plans. 529 plans enjoy strong bipartisan support. 529 plans are popular among middle-class families, not just the wealthy. Low-income families also invest in 529 plans, in part because having a 529 plan increases the likelihood the child will enroll in and graduate from college. State governments, who invented 529 plans, also support 529 plans.

When President Obama proposed to tax 529 plans as part of his 2015 State of the Union address, the pushback was so severe and swift that he dropped the proposal just a few days later. 

In any event, existing 529 plans would likely be grandfathered in, so only new 529 plan contributions would be affected by any decision to repeal 529 plan tax incentives. 

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