(Image by Nattanan Kanchanaprat from Pixabay)
Five years ago, my wife and I made the journey from New Jersey to Oregon. We immediately felt right at home because so many Oregonians, particularly in Bend, hail from other states. We all move here for different reasons: Access to the great outdoors, a lifestyle that is centered on a healthy work/life balance, the generous tax credit for college savings plan contributions.
Alright, maybe you didn’t move here for the tax credit of up to $300 (!) per year for making contributions to the Oregon 529 College Savings Plan. But I am here to let you know that many states offer some type of tax incentive, either a credit or deduction, to make contributions towards college savings.
First off, what is a 529 plan? Section 529 of the Internal Revenue Code authorizes states, state agencies and educational institutions to create tax‐advantaged plans designed to encourage savings for future education costs. Every state has at least one type of 529 plan: prepaid tuition plans and — the more common — education savings plans (which I will focus on for this article). Contributions to a 529 plan grow tax free, and distributions for qualified education expenses (like tuition and enrollment fees) also come out tax free. If you are an Oregon resident and contribute to the Oregon College Savings Plan, single tax filers can receive up to a $150 tax credit off their Oregon state income tax while joint filers can get up to $300 (the amount of credit varies based on the Adjusted Gross Income — AGI — of the contributor). For example, joint filers whose AGI is between $100,001 and $250,000 in 2021 need to contribute $3,000 to get the $300 credit. That’s a ten percent return right from the start! You don’t even need to be the owner of the account to contribute and claim the tax credit. Just remember — the contribution must be to the Oregon 529 plan to get the Oregon state tax credit.
Within Oregon’s 529 plan, there are a number of mutual fund investment options that allow you to tailor the investment mix from conservative (safe and stable) to aggressive (higher risk and, therefore, more growth potential). You can even put the investments on autopilot via a portfolio that automatically moves to more conservative investments as the beneficiary gets near the planned college enrollment year. Easy!
Typically, a parent or grandparent is the owner/participant of the 529 plan, while a child or grandchild is the beneficiary. The owner can change the beneficiary as often as they like, but investment changes are only allowed twice per year. Pro tip: if you’ve already made your two investment changes before the year is over and want to do one more, just change the beneficiary and you can make another two investment changes during the calendar year. You can always change the beneficiary back whenever you want.
How much should you save for college? That depends on a number of factors. But I encourage you to at least consider maximizing the state tax credit each year. Using our joint filers above, 20 years of $3,000 annual contributions will be worth about $115,500 assuming a six percent annual rate of return. That’s more than double the $54,000 net cost ($2,700 per year for 20 years) of the total contributions. Keep in mind that investment returns are not guaranteed, and — over a 20-year period — there could well be periods with negative performance.
To learn more about Oregon’s 529 plan, visit oregoncollegesavings.com or contact me at firstname.lastname@example.org.
Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment Advisory services offered through Raymond James Financial Services Advisors, Inc. Bend Wealth Advisors is not a registered broker/dealer and is independent of Raymond James Financial Services, Inc. Raymond James does not provide tax advice.
Rules and laws governing 529 plans are varied and subject to change. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated.
Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 college savings plans before investing. More information about 529 college savings plans is available in the issuer’s official statement. The official statement is available through your financial advisor, and should be read carefully before investing. Before investing, it is important to consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program.