By now you’ve heard the story: College costs are rising, student loan debt is out of control, and it’s going to cost a fortune to send your kids to college.
Still, if you’re like us, you definitely want your kiddos to earn a college degree. You also don’t want them to accumulate tens of thousands of dollars of debt before they even have a job. After all, Americans owed over $1.48 trillion in student loan debt by the end of 2017. That’s a staggering number, and our family has made a decision not to contribute to it, if at all possible.
If you want to help your kids pay for college, it’s important to start saving for college as early and as often as you can. Like with your retirement plans, the longer you save, the better off you’ll be.
It’s important to know that each state has their own set of rules governing 529 college savings accounts. Some states offer more incentives than others, and our home state of Indiana offers one of the best. We’ve been using the Indiana CollegeChoice 529 Plan since our girls were very young. We absolutely love it and think you will too. Here’s why.
CollegeChoice 529 Plan: Our Story
Since the moment we became parents, Holly and I have dreamed about helping our kids pay for college. That’s why we opened an Indiana CollegeChoice 529 account for each of them when they were babies.
When we first started saving, we could only afford to set aside $25 a month per child. We knew that wouldn’t be enough to pay for everything, but we figured saving a little bit for college was better than saving nothing at all. So, we did what we could at the time.
Now that we’re in a better financial position, we’ve managed to increase our contributions significantly. Use of the Indiana CollegeChoice 529 Plan allows us to claim a 20% tax credit on our Indiana state income taxes. The credit is good on the first $5,000 we put in the account each year, and we’ve even been able to max out the Indiana college savings credit over the last few years.
Here’s the best part: Since it’s a credit (not a deduction), we get $1,000 back on our taxes. That’s a great deal if you can afford it!
Saving for College: Every Penny Counts
Of course, not every family can max out the Indiana tax credit…but that doesn’t mean you can’t save a little. Saving for college is not an “all or nothing” proposition. You don’t have to foot the entire bill if you can’t afford it.
Consider this: By saving just $25 a month for 18 years in a plan that generates a modest 6% return, you’ll end up with about $9,700. That’s almost $10,000 your child can put toward college that they wouldn’t have had if you didn’t bother saving. Plus, you’ll enjoy tax benefits along the way.
As with any investment, results are never guaranteed. Still, we believe it’s always better to save something rather than nothing.
When it comes to the Indiana CollegeChoice 529 Plan, you can save as little as $10 a month. That’s as easy as skipping just one lunch at a restaurant. So, if you have children and live in Indiana, the CollegeChoice 529 Plan is an excellent way to start saving for their college education. Let’s take a closer look at how it works.
Indiana CollegeChoice 529 Plan: At a Glance
- Offered by Indiana Education Savings Authority
- Minimum Deposit to Open: $10
- Minimum for Additional Investments: $10
- Max Contribution Limit: $450,000
- 20% Tax Credit on First $5,000 Invested Each Year
- Earnings Grow Tax-Free, Provided Money is Withdrawn for Qualified Educational Expenses
- Money Can Be Transferred to Another Family Member
- Students Can Attend Nearly Any U.S. Accredited College, University, Graduate Program, or Technical School
How Does the Indiana 529 Plan Work?
The Indiana CollegeChoice 529 Plan is designed to get the most out of the money you save for college. It also comes with a significant tax savings for you right now – all while you plan for your child’s future. Offered by the Indiana Education Savings Authority, this college savings plan offers some significant tax advantages like tax-deferred growth and high contribution limits.
As long as the money is used for qualified educational expenses, earnings in an Indiana 529 Plan grow tax-free. Qualified expenses include things like tuition, books, certain room and board costs, and more. Even if you withdraw the money for non-qualified expenses, the earnings will still grow tax-deferred.
When you open an Indiana 529 Plan, you also get to choose from a few different investment options. Conservative investments grow the slowest but may present less risk. Higher-risk investments may offer the chance for higher returns, but they are generally considered to be more volatile. (Editor’s note: Like with all investments, the chance exists that you could lose money, and there are no guarantees of performance or growth.)
You are not required to make regular contributions, and the minimum balance required to open an Indiana 529 Plan account is just $10. Additional contributions are also subject to a $10 minimum. While most people will never meet it, keep in mind that each beneficiary account has a lifetime cap of $450,000 in total contributions.
After creating an account, you may want to consider sharing the news with your family and friends. Anybody can contribute to an Indiana CollegeChoice 529 Plan, making it a great gift idea for your little ones.
Tax Benefits of Indiana CollegeChoice 529
When it comes to taxes, the money contributed to an Indiana CollegeChoice 529 Plan is not tax-deductible. However, it grows tax-free as long as it’s used on qualified educational expenses. With that said, you can use the money on anything you like, you just won’t get as big of a tax benefit from it. The money still grows tax-deferred, but you lose the tax-free withdrawal when you use it on non-qualified expenses.
Additionally, the Indiana 529 Plan comes with a very generous tax credit. Residents of Indiana who contribute to an Indiana CollegeChoice 529 Plan are entitled to a 20% tax credit on the first $5,000 they contribute to plans each year. (That’s a total of $5,000, not per beneficiary.) For those who max out the credit like we do, that is $1,000 back on our Indiana state income taxes every year! Over the course of 18 years, that’s an extra $18,000 in free money that your child can use toward the cost of college. Pretty sweet, right?
Here’s another example: Let’s assume you have two children and you contribute $50 a month to each of their Indiana 529 Plans. That is a total annual contribution of $1,200. As an Indiana resident, your contributions entitle you to a state tax credit of 20%, or in this case $240. The credit will either be applied toward the tax balance you owe, or you’ll receive it as part of your Indiana state income tax refund!
Remember, anybody can contribute to an Indiana CollegeChoice 529 Plan – including parents, grandparents, relatives, and friends – and they don’t even need to be an Indiana resident to do it. Contributions can be made by check, electronic funds transfer, through a Upromise account, and more. Keep in mind, though, that the Indiana income tax credit is only available to residents of Indiana.
Pros of a CollegeChoice 529 Plan
There are a lot of advantages to using an Indiana CollegeChoice 529 Plan. Before jumping in, it’s important to take a look at your family’s situation to get the most out of opening an account.
- Indiana gives a 20% tax credit (that’s a credit, not deduction) that provides up to $1,000 back each year.
- The money you put in grows faster because it’s tax-deferred.
- There is a low minimum requirement to open, making it easier to get started.
- You can contribute as little as $10 a month.
- Withdrawals for qualified higher education expenses (or, as of 2018, K-12 school tuition) are exempt from federal tax and usually are exempt from state tax, too.
- You can control the money in the account until it’s withdrawn and used for educational expenses.
- You can transfer it to another family member if your child doesn’t use it.
- Any individual (parents, grandparents, friends, etc.) can contribute up to $15,000 a year per beneficiary without gift tax penalties applying.
Cons of Using an Indiana 529 Plan
- To be eligible for tax-free withdrawals, money can only be used for qualified educational expenses.
- There’s a penalty tax if you use the money to pay for things that aren’t qualified educational expenses.
- Having a higher balance in your 529 account might reduce your eligibility for financial aid awards.
- For some people, especially grandparents, it could affect your ability to qualify for Medicaid assistance. You’ll want to check with your local Medicaid office to find out more.
How to Open an Indiana CollegeChoice 529 Plan
Opening a new account online is easy and only takes about 10 minutes. If you prefer the old-school method, you can also open an account by mail. For parents with more than one kid, you’ll want to open an account for each child.
If you don’t have a lot of money to get started, that’s okay. You only need $10 to establish an Indiana 529 account, and you can set up automatic transfers from your bank account to make saving even easier.
The Bottom Line
As a parent, you want to do everything possible to set your children up for success. Entering adulthood with student loan debt is a huge burden, and anything you save toward college will be helpful. That’s why we firmly believe parents who can save for college should do so.
Still not convinced? Then ask yourself this: Is your student loan paid off? If it isn’t, think about how much easier things would be if you didn’t have to worry about that student loan debt hanging around your neck. Even if you can only save $10,000, that’s $10,000 they won’t have to borrow and pay back for years to come!
If you’re going to save money for college, the Indiana CollegeChoice 529 Plan is a great option. It’s only $10 to get started, the money grows tax-free (when withdrawn for qualified educational expenses), and there’s a generous 20% tax credit on the first $5,000 that Indiana residents contribute annually. Why wouldn’t you want to take advantage of that?
Thanks for reading and good luck!
Do you contribute to an Indiana 529 Plan or a college savings plan in your state? What do you think of it? Let us know in the comments below!