If you are a Pennsylvania resident planning to pay for a child's college education in the future, you could be receiving tax benefits by saving through a state 529 college savings program.
Pennsylvania's 529 college savings programs are a tax-advantaged way to invest and save for educational expenses—usually college, but you can also use Pennsylvania 529 funds to pay for tuition at private elementary or secondary schools, too, as well as some apprenticeship programs and career schools.
Two 529 Plan Options
Contributing to a child's college fund through a Pennsylvania 529 plan lets family and friends help pay for school and receive a tax benefit, too. These plans are called "529" plans because they reference Section 529 of the Internal Revenue Code, which provides special tax breaks for families saving money for education.
Regular contributions to a 529 plan will, with the help of compound interest, grow the available funds over time and help pay for educational expenses down the road.
The Pennsylvania program includes two plans:
- The 529 Guaranteed Savings Plan
- The 529 Investment Plan
The 529 Guaranteed Savings Plan
The Pennsylvania 529 Guaranteed Savings Plan (GSP) is a prepaid tuition plan designed to help your savings keep pace with rising tuition costs. If you use the plan to save enough for a semester of post-secondary tuition today, you'll have enough for a semester of post-secondary tuition years down the road—even if prices have gone up in the meantime.
Here's how it works: When you enroll in the Guaranteed Savings Plan, you choose a tuition level for your beneficiary:
- State system of higher education
- State-related universities
- Community colleges
- Ivy League colleges
- Private four-year colleges
These levels correspond to a GSP credit rate, with community colleges being the lowest and Ivy Leagues being the highest.
Don't worry, you're not locked in—you can change the selected tuition level at any time.
Your contributions are calculated to purchase GSP credits corresponding to your selected tuition level.
For example, at a credit rate of $321.50 for State System of Higher Education schools at a Pennsylvania resident status, a $1,000 contribution could buy more than 3 GSP credits. For Ivy League schools, the credit rate would be $2,345.90; $1,000 would buy less than half a credit.
Saving 96 credits is typically enough for four-year schools, and credit rates are effective from September 1 to August 31 of the following year.
There is an enrollment fee of $50 to join the plan by mail and $25 if enrolled online. There is an account maintenance fee of 44 basis points ($4.40 per $1,000) with a maximum annual fee of $500 for accounts receiving paper statements, and 35 basis points ($3.50 on $1,000) for paperless accounts.
The 529 Investment Plan
With the Pennsylvania 529 Investment Plan (IP), you control your 529 funds through your choice of investments in 17 different investment options, ranging from conservative to aggressive, offered by The Vanguard Group. You can choose from three age-based options and 14 individual funds.
Your returns depend on the fund you choose and market performance; they could be higher or lower than tuition inflation.
You can open a PA 529 IP account with $10. There is no account maintenance fee for paperless accounts; other accounts are charged an $18 account maintenance fee. There are also underlying expenses and asset-based fees, which range from 0.38% to 0.50%.
Benefits of the Pennsylvania 529 College Savings Plan
Pennsylvania’s 529 program has several benefits.
Pennsylvania taxpayers can deduct from their state taxable income up to $16,000 in contributions to 529 plans per beneficiary per year, or $32,000 if they're married filing jointly and each spouse has an income of at least $16,000. The maximum contribution limit per beneficiary is $511,758 as of 2022. There are no age or income restrictions on contributions.
Your contributions grow tax-deferred while they remain in the account, and withdrawals for qualified educational expenses are tax-free.
Considering that Pennsylvania has a flat state income tax rate of 3.07%, reducing taxable income by $16,000 can save a taxpayer up to $491.20 at tax time. You can also send state income tax refunds directly to a 529 account.
Your Funds Are Safe
The Pennsylvania plan does not count assets in a 529 account when calculating financial aid for state residents, unlike many 529 plans. You can use a Pennsylvania 529 to give a gift, since the entire value of your account is also exempt from the Pennsylvania inheritance tax. Plus, the account owner, not the beneficiary, retains control over the account.
The funds can still be used for technical or career schools, or they can be transferred to another beneficiary, such as a sibling, if the beneficiary chooses not to attend college.
SAGE Scholars Tuition Rewards
Another unique benefit to Pennsylvania 529 plans is the SAGE Scholars Tuition Rewards program. This program provides tuition discounts to more than 300 private colleges.
Every quarter, a 529 account owner can earn Tuition Rewards, which equal 2.5% of the value of your account. Every point you earn can later be redeemed for $1 in scholarships at participating schools. This program is separate from the 529 Program and not affiliated with the state treasury department.