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Sunday, January 29, 2023

A Tax-Friendly State of Mind

We Hoosiers may disagree on certain things: highways linking Indianapolis to Evansville, Central Time Zone vs. Eastern Time Zone, or really important stuff like Indiana University vs. Purdue University. But here’s something that everyone from Fort Wayne to Fort Branch can embrace; our state’s CollegeChoice 529 Direct Savings Plan.

529s provide a tax-advantaged way to save for college or technical school. Primarily, parents and other relatives use them, but anyone can contribute. You get a range of choices in how to invest, from conservative certificates of deposit or savings accounts to more risky stock funds. Your money grows tax-free, and withdrawals are also tax-free when it’s time to pay for school. That’s the deal no matter which state’s plan you choose, and you can pick a plan from any state.

What makes Indiana’s 529 stand out is the tax credit. Indiana taxpayers who contribute to CollegeChoice 529 (www.collegechoicedirect.com) can take a 20 percent credit (up to $1,000) off state income taxes annually. In other words, if you contribute $5,000, you’ll get $1,000 off your Indiana taxes. (Remember, a tax credit is more valuable than a deduction.) Last year, Morningstar, Inc. ranked Indiana as having the most tax-friendly 529 in the nation. Indiana taxpayers are the only ones who can benefit from Indiana’s tax credit, but the beneficiary doesn’t have to be an Indiana resident.

“What makes the 529 even more attractive is its flexibility,” says Perry Moore, director of wealth planning for Payne Wealth Partners, Inc. “Let’s say your oldest child receives scholarships and does not need their 529 funds, but your younger child is attending medical school. You can change the beneficiary of the 529 to your younger child, all while preserving the many tax benefits associated with these plans.”

529s are not bullet proof. The financial bust of 2008-09 took its toll on families invested heavily in stocks, and you’ll get a 10 percent tax penalty on your earnings if withdrawals are not used for education expenses. But in this era of increasingly higher costs for secondary education, it’s nice to know that Indiana residents get a break. All Hoosiers can agree on that.

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