Benefits of a 529 Plan in Colorado
A 529 Plan is a tax-free way to save for education, offering significant flexibility and growth potential. In Colorado, these plans come with added perks like state tax deductions of up to $34,000 and incentives for new parents and qualifying families. Funds grow tax-free and can be used for a wide range of educational expenses, from college tuition and expenses such as room and board, to vocational training and trade schools. The ability to change beneficiaries and even roll over unused funds into a Roth IRA makes a 529 Plan adaptable to different needs, making it a smart choice for long-term educational savings.
During my time as a 529 Specialist, I had the privilege of helping families set up these educational savings accounts, whether for newborns or children heading off to college. The more I learned about the flexibility and advantages these plans offer, the clearer it became how valuable they are for long-term educational planning. One of the most rewarding experiences I had was with a family who had just brought their first child into the world. I had the opportunity to work with grandma and grandpa, who wanted to fund their granddaughter’s college education. They were unsure of the benefits/costs of the 529 compared to other plans available, but after walking them through the features of a 529 plan, they decided to open one for the new baby, and open an additional 529 for their unborn second grandchild, just to take advantage of the tax-free growth over a longer time horizon.
What is a 529 Plan?
A 529 Plan is a tax-advantaged savings vehicle designed to help families cover educational expenses such as tuition, fees, books, room, and board. It can be used for a variety of different expenses needed when pursuing both K-12 schooling and higher education. Contributions grow tax-free, meaning no taxes are owed on the earnings as long as the funds are used for qualified education costs. You can use 529 Plan funds at a wide range of institutions, including community colleges, public and private universities, vocational schools, and trade programs, offering great flexibility.
When can you start investing?
The key to investment growth is simple: time in the market, not timing the market. For individuals planning to have children in the future, an option that is commonly overlooked is opening a 529 Plan in your own name before your child is born. By doing this, you can get a head start on investing and take advantage of tax-free growth early. Once your child is born, you can easily change the plan’s beneficiary from your name, to their name. This early start allows you to maximize the potential for investment growth, giving you more time to accumulate savings and build your portfolio. It’s an excellent way to begin preparing for your child’s future educational expenses before they even arrive.
Another key feature of this plan is the flexibility of beneficiary changes. If your child doesn’t use all the funds in their 529 Plan, or chooses not to pursue higher education, you can change the beneficiary to another eligible family member, keeping the savings and growth within your family. Alternatively, if you decide to return to school, the funds can be used for your own qualified educational expenses, or paying off your own student loans up to $10,000, giving you another way to take advantage of the plan’s flexibility.
Additionally, as long as the 529 has been open for at least 15 years, you can roll over up to $35,000 of unused 529 Plan funds into a Roth IRA, providing another valuable option for long-term savings. For example, if your kiddo’s school ends up costing less than the funds you have saved in their 529, those funds won’t go to waste. You can still reap the benefits of tax-free growth and withdrawals from a Roth IRA. Keep in mind that non-qualified withdrawals may be subject to taxes and a 10% penalty on earnings. This flexibility makes a 529 Plan a great option not only for parents planning for their children’s future but also for individuals who want to invest in their own continued learning.
Low Costs and High Contribution Limits
Setting up a 529 Plan typically involves minimal fees, which are often lower than those of traditional investment accounts. Colorado residents can contribute up to $500,000 per beneficiary across all 529 accounts, making it possible to save significantly over time.
There are no income restrictions, meaning anyone can participate and enjoy the benefits.
In Colorado, the costs of a 529 plan can vary based on the specific investment options you choose. Here’s a cost comparison of the four different types of 529 plans offered in Colorado:
Direct Portfolio (CollegeInvest Direct Portfolio Plan)
- Fees:
- Annual asset-based fees: Ranges from 0.22% to 0.46%, depending on the investment option (such as age-based portfolios or individual portfolios).
- Fund expense ratios: Between 0.02% to 0.43%.
- No enrollment or maintenance fees.
- Investment Options: There are thirteen different 529 investment options ranging from conservative to aggressive. This plan allows you to choose between Age-Based options, managed by a professional, or select your own portfolio .
- These are not self directed plans, meaning you cannot hand pick your investments. You will be able to choose your risk-tolerance, and will be invested in a portfolio that aligns.
- Overall Cost: The fees for this low-cost option are associated with investments, and allow investors to participate in market growth.
Stable Value Plus (CollegeInvest Stable Value Plus Plan)
- Fees:
- Investment Options: There are no investment options, as this plan guarantees principal and return.
- Additional Features:
- Provides guaranteed returns set annually and principal protection, making it a conservative, low-risk option.
- Overall Cost: This plan has low costs but is designed for more conservative investors seeking principal protection.
Smart Choice (CollegeInvest Smart Choice College Savings Plan)
- Fees:
- No annual asset-based fees or fund expense ratios.
- No enrollment or maintenance fees.
- Investment Options:
- Money Market Savings Account: Allows deposits and withdrawals at any time.
- 1-Year Time Account: Time Accounts offer low-risk investment opportunities and higher interest rates by locking in your deposits for a specified period of time. Deposits can be made at any time.
- Additional Features:
- This plan is a FDIC-insured savings option, offered through a partnership with FirstBank and NBH Bank.
- The interest rates vary, but the plan has no underlying investment management fees.
- Overall Cost: While there are NO fees, making this the most cost-efficient plan, returns are based on interest rates rather than market performance, which means that you are not able to participate in market growth.
Scholar’s Choice (Advisor-sold 529 plan)
- Fees:
- Annual asset-based fees: Ranges from 0.52% to 1.18% depending on the investment choice and share class.
- Fund expense ratios: Typically range from 0.10% to 0.87%, based on the underlying mutual funds.
- Sales loads: You may pay upfront sales charges depending on the share class (A, B, C shares).
- Investment Options: This plan has the most variety when it comes to investment options, with 28 different portfolios to choose from. You are able to work directly with an advisor to customize your portfolio to your specific needs. The different options available can be found at: Scholar’s Choice: Investment Options
- Additional Features:
- You must work with a financial advisor to access this plan.
- Overall Cost: The most expensive option due to advisor fees and higher fund expense ratios. However, it offers professional financial advice and customizable investments.
Summary of Costs:
- Direct Portfolio: Low cost, with asset-based fees from 0.22% to 0.46%, ideal for self-directed investors.
- Stable Value Plus: Moderate fees at 0.34%, focused on conservative, stable returns.
- Smart Choice: No fees, offering a low-risk, FDIC-insured option based on interest rates.
- Scholar’s Choice: The highest cost, ranging from 0.52% to 1.18%, due to advisor involvement and higher fund expenses.
Each plan’s costs align with its investment strategy and level of risk, with Direct Portfolio and Smart Choice being the most cost-effective for self-directed investors, while Scholar’s Choice is designed for those seeking advisor support despite higher fees.
Always review specific plan documents to understand the fees associated with your chosen investments.
Generous Tax Benefits
While you do not need to open a 529 plan in the state you live in, nor does your child have to go to school in the state where the 529 is held, each state offers unique tax advantages. One of the biggest draws of Colorado’s 529 Plans is the state tax deduction. For 2024, single filers can deduct up to $22,700 per beneficiary, while joint filers can deduct up to $34,000 per beneficiary from their Colorado taxable income. These tax benefits boost your savings potential, helping your investment grow faster, and providing for a deduction in your owed taxes.
Colorado also offers additional incentives to encourage saving for education:
- $100 Contribution: Families with children born in Colorado after 2020 can receive a $100 contribution from the state when opening a 529 Plan.
- Matching Funds: Low- and middle-income families may qualify for a matching contribution of up to $400 on their 529 Plan savings, making it even easier to start investing.
The Matching Grant Program Application can be found on the college invest website: CollegeInvest.org. The current application period for 2025 is open until December 31st, 2024. In order to qualify for this program, applicants must meet the following criteria:
- You must be a Colorado resident
- You must be able to claim the Beneficiary as a dependent on your Federal Tax forms
- You must be the Parent/Guardian of the 529 CollegeInvest Savings account
- Eligible contributions are contributions made by the Account Owner during the contribution period. Upromise, Ugift, employer promotions and other non-account owner contributions do not qualify for the match.
- You must carefully read and accept the Terms & Conditions
- You must have a Family Adjusted Gross Income (AGI) from the Federal Tax forms that is at or below the figures shown in the income eligibility chart on CollegeInvest.org
- If filing separately, your AGI must be from all Parent/Guardians in the household Federal Tax Forms
Whether you’re opening a plan early to take advantage of compound growth or starting later to maximize state tax benefits and incentives, a 529 Plan provides security and peace of mind. With features like the ability to change beneficiaries, use funds at a variety of institutions, pay off existing student loans, and even roll over unused funds into a Roth IRA, the flexibility of these plans makes them a smart choice for anyone investing in education. No matter when you start, a 529 Plan is a valuable step toward securing a brighter educational future for you or your loved ones.
To read more about this educational savings plan or get started: CollegeInvest.org
