By: Allie Schmidt, Financial Advisor, CFP®, CPA
My wife, Stacy, and I just had our first baby in December, our daughter Wesley Louise. As I sit here today writing this, she is just 6 weeks old. In one regard I can’t believe she’s already 6 weeks old and in another, I can’t believe it’s only been 6 weeks since we’ve had a solid night of sleep— that seems like forever ago! (and in that regard, forgive any errors in my write-up here…living on coffee these days). But, either way, a consistent message many veteran parents are telling us newbies is that “they grow up too fast” or “next thing you know they’ll be in college”. So, to me, that screams college planning, of course…right? I am a financial planner after all. Needless to say, this is not my first rodeo when it comes to sitting down to think about college planning, but it is the first time to sit down to think about college planning for my family. I wrote last year, “Then comes the baby in the baby carriage”, (you can find on our blog www.hdwscolorado.com/blog) about several different options for college planning depending on your specific situation. As I scanned through the options and assessed our situation, I started to think about all of the questions that have come up over the past decade that I’ve been helping other parents plan for this momentous and incredibly expensive venture. I thought this would be a good month to pull out a couple of questions that seemed to repeat themselves in my conversations over the years, just in case they’re on your mind too. These issues are specific to Colorado state sponsored 529 college savings plans (“Colorado 529”).
- Do I get a tax deduction? It depends. If you live in Colorado and utilize one of the Colorado 529 Savings plans (i.e. Scholar’s Choice, CollegeInvest), then yes, you will receive a STATE tax deduction for your contributions. Remember, this is a state tax deduction, not a federal tax deduction.
- Do my kiddos have to go to a Colorado school if I use the Colorado 529 plan? No. You can use the assets in your Colorado 529 plan for any eligible college, university, vocational, or trade school. You are definitely not locked into a Colorado state school. (However, for Stacy, I have to add….Go Rams!).
- Who can contribute? Anyone can contribute to your Colorado 529 Savings Plan within the contribution limits. I’ve seen a lot of grandparents take advantage of the opportunity to help send a grandchild to college with birthday or holiday gifts into the account.
- Does Colorado have a pre-paid tuition program? Unfortunately, no. Colorado had one in the past, but it was closed and all assets were liquidated in 2013.
- What happens if my child is the next Missy Franklin and gets a scholarship? You have a couple of options here: 1. You could change the beneficiary to another child or even yourself for future college expenses. 2. You could use the funds to cover other eligible expenses (i.e. books, room & board, other expenses not covered in the scholarship). 3. You can withdraw the funds, equal to the scholarship amount, without incurring the 10% federal penalty on the earnings portion. The earnings portion (but not contribution amounts) of your withdrawal is subject to state and federal income tax.
Like I mentioned, there are several other college savings options outside of a state sponsored 529 plan as well. As for our family, we’ll be using a combination of one of the Colorado 529 plans each month (allowing grandparents or aunts and uncles to contribute to if they choose to be so generous), and we’ll continue to look for appropriate municipal bond zero coupon (in my other article) for additional tax savings. It’s never too early to open a college savings account for your little one. I know we will rest a little easier—in the few hours we get lately—knowing that we will be prepared for our little girl’s college expenses. Time for another cup of Joe!
As always make sure to sit down with your tax and financial advisor to discuss what is best for you and your situation. For additional information on Colorado 529 Savings Plans, check out www.collegeinvest.org.
*Information obtained from www.collegeinvest.org.
Disclosure: Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 plans before investing. This and other information about 529 plans is available in the issuer’s official statement and should be read carefully before investing. Investors should consult a tax advisor about any state tax consequences of an investment in a 529 plan.
Allison Schmidt is a Financial Advisor, CFP ®, and CPA with Higgins & DeYoung Wealth Strategies and with Raymond James Financial Services located at 12303 Airport Way, Ste 145, Broomfield, CO 80021. Allison Schmidt can be contacted at 720.287.0918, allison@hdwscolorado.com. Higgins & DeYoung Wealth Strategies is an Independent Firm. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Raymond James is not affiliated with the Colorado 529 programs.
