The Most Important Thing To Do With Your 529 Before Year-End

Taxes

Like it or not, the end of the year is approaching fast. While you may be focused on the holidays, don’t let the season go by and leave money on the table. Other tax-preferred savings plans like IRAs allow you to claim your deduction as late as April of the following year. However, 529 plans have varying deadlines set by the state. Miss the end-of-year deposit deadline for your plan, and you could be missing out on significant state tax savings.

Do your entire family a favor by investing in a higher education while saving money on taxes.Getty

Understand How Your State Calculates Its Benefit

Because the terms of state tax benefits vary widely it is important to understand how that benefit is calculated. Over 30 states plus the District of Columbia offer some form of tax incentive for residents to contribute to a 529 account. This may come in the form of a tax deduction or credit, and each state calculates them differently.

For example, Indiana offers a 20% tax credit on up to $5,000 in contributions to the respective State’s 529 plan per contributor. That’s a maximum of a $1,000 credit for a single filer. However, Kansas offers up to a $3,000 deduction per beneficiary regardless of which state plan you use, so the more children for which you have accounts, the greater the deduction you can claim.

A tax deduction reduces your taxable income, giving you a percentage reduction in taxes owed reflective of your tax bracket. For example, someone in the 25% tax bracket would get $25 in savings off a $100 deduction. Conversely, a $100 credit would be worth $100 regardless of tax bracket. A tax credit of the same amount as a deduction is always worth more, as a result. The IRS has great examples of this on their site.

Whether the state assigns its benefit by contributor or by beneficiary is important. For example, in Indiana a single filer can open accounts for two children and put $3,000 into both accounts for a total of $6,000, but the contributor can only claim $5,000 for the tax credit because it is assigned per contributor. In Kansas you can deposit $3,000 into two accounts and claim a $6,000 deduction. So a Kansas resident will continue to get additional benefit from opening multiple accounts. It might sound confusing, but you really only need to understand how your state calculates its benefit.

There’s A Deadline For That Benefit

Once you understand how the benefit is calculated, you need to know by what date to make your deposit to claim it. You do not want to drop your check in the mail on December 31st only to find out your state requires that it receive the deposit prior to calendar year-end. Conversely, a few states allow prior-year deductions up until April of the following calendar year.

The following graphic shows the tax benefit for every state and the date by which the deposit must be received in order to claim that benefit. Listed values are for single filers. All deductions or credits are doubled for married couples filing jointly unless otherwise indicated. For example, the Idaho deduction of $6,000 per contributor is $12,000 for a married couple filing jointly, and must be received by the program manager prior to December 31st of the respective year to qualify for a state tax deduction.

Data gathered directly from plan data or customer support, and believed to be accurate as of 12/3/2018. All data is subject to change. Contact your state for details.529 Expert, LLC

This table is meant to provide a quick overview; be sure to contact your state or tax professional for details.

Avoiding Deadlines Entirely

Setting up an AIP (Automatic Investment Program) through your 529 provider is the safest way to ensure you never miss state tax benefits. An AIP allows you to make contributions automatically from your bank account or paycheck directly into your 529 plan. That way, you never have to scramble at year-end – or worse, forget – to ensure your contribution gets processed in time.

The easiest thing to do to ensure you maximize your state tax benefit is divide the benefit by the number of annual periods of your AIP. For a married couple in Idaho, they would set up their AIP to deposit $1,000 to their account monthly to match the maximum deduction of $12,000 for the two contributors. Voila: That couple need never worry about missing an end of year deadline!

Never worry about missing your 529 tax benefit again!529 Expert, LLC

AIPs have the added benefit of dollar-cost averaging automatically. This reduces the risk of market timing, lowers your average price paid over time, and increases your potential return. You can learn more about the benefits of an AIP in the Forbes article, How To Easily Save More For College.

Other Benefits

Many states, including those without a state tax, offer additional incentives such as matching grants and scholarship programs. Eligible Alaskans, for example, receive a permanent dividend from the Alaska Department of Revenue. By using their payment towards an Alaska 529 account, participants are automatically eligible for an annual $25,000 scholarship. North Dakota’s CollegeSAVE plan offers both a grant for newborns of $200 and a matching grant for residents who qualify of up to $300. Almost every state offers some form of scholarship, matching grant, giveaway, or other program to its residents, so check with your state sponsor to see what other benefits may be available for you.

ScholarShare 529 Matching Grant Program Press Conference on Thursday, Dec. 7, 2017, at the California Science Center in Los Angeles. (Matt Harbicht/AP Images for ScholarShare 529)ASSOCIATED PRESS

If you have questions specific to your state or program, you should always contact your 529 provider for more information.

This information does not constitute tax advice and is provided for informational purposes only. Please consult your tax advisor, financial advisor, local taxing authority, and/or plan provider or sponsor for more information.

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