Pennsylvania's 529 College Savings Program

Learn About the Tax Benefits of a PA529 Account

Doing her taxes at home. PeopleImages

If you are a Pennsylvania resident who plans on putting a child through college one day, you can start your financial planning now by learning about the tax benefits of the state's 529 college savings program. 529 Plans offer tax-advantaged ways to save money. 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 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. The Pennsylvania program includes two plans:

  • Pennsylvania 529 Guaranteed Savings Plan (GSP): This is a lower-risk, pre-paid tuition plan designed to help your savings keep pace with rising tuition. Pennsylvania residents acquire units that increase in value over time to track average tuition increases in one of several school categories as selected by the participant. If you save enough for a semester at one of the state universities today, you'll have enough for a semester at that school in the future – no matter when or how much tuition has gone up in the meantime. It’s a good way to save, even if you’re not a financial guru because the Pennsylvania Treasury Department does the investing work for you.
  • Pennsylvania 529 Investment Plan (IP): Here you can choose from 15 different investment options offered by The Vanguard Group. Funds range from conservative to balanced or aggressive in their investment approaches. How you invest is up to you. Anyone can open a PA 529 IP account with as little as $25 and make contributions of $25 or more whenever you want. Payroll deduction and automatic investing plans make saving even easier.

    Benefits of the Pennsylvania 529 College Savings Plan

    Pennsylvania’s 529 Plan has benefits in several areas - tax, financial aid, and inheritance. In the tax area, Pennsylvania taxpayers can deduct up to $14,000 in contributions to 529 plans per beneficiary per year, or $28,000 if married filing jointly, assuming each spouse has an income of at least $14,000.

    This amount reduces their Pennsylvania taxable income for the purposes of determining their state income taxes. The maximum contribution limit for all Pennsylvania plans is $511,758. Pennsylvania residents also receive a tax deduction for contributing to a 529 Plan in another state, if you find an opportunity in another state that is more appropriate to your needs.

    When it comes to financial aid, the Pennsylvania plan does not count assets in a 529 account when calculating financial aid for state residents, unlike many 529 plans. The entire value of your account is also exempt from Pennsylvania inheritance tax. PA 529 assets are also protected from creditors in Pennsylvania, while assets in out-of-state plans are not protected.

    Another unique benefit to PA 529 plans is the SAGE Scholars Tuition Rewards program, which offers tuition discounts to 300+ private colleges nationwide, including over 50 in Pennsylvania.

    Each quarter you earn Tuition Rewards equal to 2.5% of the value of your PA 529 account, which adds up to approximately 10% per year. Each point is worth $1.00 in scholarships at SAGE member schools.

    Claiming the Pennsylvania 529 Deduction

    Pennsylvania residents trying to decide whether to use a Section 529 plan versus other types of college accounts need to factor in the potential tax savings of contributing to a 529 plan. Considering that Pennsylvania has a flat state income tax rate of 3.07 percent, each deduction of $14,000 can save a taxpayer up to $429.80 at tax time.

    Residents can claim the Pennsylvania 529 plan tax deduction on their PA-40 Schedule O Form. Additional information on the Pennsylvania deduction can be found on the Pennsylvania Department of Revenue's website and the official PA 529 Network website.