Tax-free-high-yield college savings
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If you are looking for a safe and tax-efficient way to save for education, here are three reasons to look at Indiana’s CollegeChoice 529 Plan.
Reason #1: High Yield FDIC Insured Investment
Indiana’s 529 plan offers many different investment options. One investment has recently begun to look interesting for those wanting a safe option. Indiana’s 529 plan offers an investment selection called the Savings Portfolio, an FDIC-insured high-yield savings portfolio.
The current yield on that investment is 4.63% as of July 16, 2023. This investment can also be tax-free, as outlined in reason number two below.
Reason #2: Tax-Free Returns
A major benefit of 529 plans is that their earnings and growth are tax-free if the money is used for qualified expenses. Qualified expenses cover college expenses but have expanded more recently to include limited amounts for student loans and K-12 costs.
For college, qualified expenses generally cover tuition, fees, books, supplies, computers, room and board, etc.
If you are interested in more detail, several great articles on what are considered qualified expenses online will expand on these areas.
Reason #3: Tax Credit
If you still need more than the potential for a tax-free yield of 4.63% to get you interested, you may also qualify for a state tax credit on your tax return. For individuals that file an Indiana tax return, they are eligible for a tax credit of 20% of their annual contributions up to a maximum tax credit of $1,500 per year. Assuming the funds are eventually used for qualified expenses, that is a one-year tax-free return of 24.63%!
Indiana still offers the tax credit even if the contributions are needed for qualified expenses in the same year. This can still be a great strategy for students already in college.
Please note that you may have to pay the Indiana state tax credit back if the funds are distributed for non-qualified expenses.
Summary
Only this year has the FDIC insured Savings Portfolio yield become attractive. Combining it with the tax-free potential and the state tax credit makes it a fantastic opportunity for those setting aside money for upcoming education expenses. For those with students already in school, do not overlook this strategy as an option to help with those expenses. It is rare to find the combination of a high-yield FDIC-insured investment with the tax benefits outlined above, so take advantage of it if you can.
Ryan Collier, CIMA, is the Director of Investment Management at Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.BedelFinancial.com or email Ryan at rcollier@bedelfinancial.com.