College Tax Benefits for Colorado Residents
Rules for Claiming the Colorado Section 529 Tax Deduction
Families putting together a college savings plan often consider 529 Plans, which offer tax-advantaged ways to save money, as a potential option. If enough money is saved through this vehicle, there is less stress at admissions time about applying for financial aid or searching for scholarships. Investments made in these accounts will grow free of federal and state income taxes. In addition, all withdrawals used for qualified higher education expenses are exempt from federal income tax. Some 35 states also waive state taxes on withdrawals, along with offering other incentives.
Through these tax-deductible plans, family members and friends can contribute to a child's college fund, and get a tax benefit for doing so. Over the years, with regular contributions and compound interest, the plan can grow significantly to provide for the child's educational expenses. Colorado has four options available through the CollegeInvest 529 College Savings Plan:
- CollegeInvest Direct Portfolio College Savings Plan: The team of Ascensus Broker Dealer Services, Inc. and The Vanguard Group manages the direct-sold Colorado Direct Portfolio College Savings Plan. It features age-based and static portfolio options utilizing Vanguard mutual funds.
- Scholars Choice College Savings Program: If you prefer to work with a financial advisor, the Scholars Choice College Savings Plan offers advisors and investors alike a variety of great benefits. It features a lineup of age-based, static multi-fund, and individual fund portfolio options utilizing funds managed by Legg Mason affiliates as well as non-proprietary Thornburg Investment Management and Franklin Templeton Investments.
- CollegeInvest Smart Choice College Savings Plan: This direct-sold college savings plan offers two FDIC-insured options through FirstBank: a one-year time savings account and a money market savings account.
- CollegeInvest Stable Value Plus College Savings Plan: This direct-sold plan offers a single option: a stable-value investment under a funding agreement with MetLife that declares a new interest rate each year.
Colorado also offers a Matching Grant Program, which provides a dollar-for-dollar match of up to $400 in contributions for lower- to middle-income Colorado residents to accounts with an eligible beneficiary. Applications are accepted each year between September 1 and December 31. The match can extend for a maximum five years, but matching grants for future years are subject to continued funding by the sponsor.
The CollegeInvest 529 Scholarship provides a $2,000 scholarship to any full-time student who is a Colorado resident, has maintained or has had a parent/guardian maintain a CollegeInvest account for at least two years, and can substantiate an expected family contribution (EFC) between $5,000 and $25,000. This scholarship is designed to reward Colorado residents of middle income families who have planned for a higher education by saving with a CollegeInvest 529 College Savings Plan. It is renewable each year up to a total of four years or $8,000.
Applications are accepted January 1 through May 15.
The State of Colorado is one of just five states that allow an “unlimited” deduction for contributions to its Section 529 accounts. This is in contrast to other states that put a restriction, such as a maximum of $2,500, on the amount of contributions that can be deducted on residents' state income tax returns. Distributions from the Colorado Section 529 plan that are used for qualified education expenses are not subject to taxation.
Colorado residents trying to choose between a Section 529 plan and other savings vehicles need to account for the potential tax savings of using the state's plan. Considering that the top income tax bracket for Colorado residents is 4.63%, every $1,000 contributed to a Colorado Section 529 plan could save a maximum of $46 at tax time. In other words, receiving the deduction could be similar to a 4.63% bonus on the amount contributed. As of 2015, contributions by residents to a Colorado Section 529 plan are deducted on Line 10 of the Colorado Individual Income Tax Return (Form 104).
Remember, Colorado residents only receive a deduction for contributing to Colorado’s CollegeInvest or Prepaid Tuition programs, not other states' plans.
It is never too late to start saving for a college education. Saving at any age gives you the stepping-stones toward you and your child’s goal.