In addition, the full amount of your contributions can be deducted from your income for state tax purposes, and you have the option of directly depositing your state tax refund into your CollegeInvest account. Through these tax-deductible plans, family members and even friends can contribute to a child’s college fund and get a tax break for doing so. Since January 1, 2018, 529 accounts may also be used for expenses at an elementary or high school, but Colorado’s CollegeInvest accounts can be used only for higher education. The maximum amount that can be saved for a single beneficiary is $400,000. College plan money must be used for qualified expenses such as tuition and fees; books; certain room and board expenses; required supplies; computer hardware (desktops, laptops, or tablets), peripheral equipment (including a mouse, keyboard, printer, scanner, or monitor), and software; and internet access.
The Four Kinds of Colorado Plans
Colorado offers four types of 529 plans, all of which are designed to help save for higher education, including community colleges, four-year public or private colleges, and universities, graduate and post-graduate programs, and vocational and trade schools. The Colorado plans, like other such state plans, are named after the numbered section of the Internal Revenue Service code that authorized states to create them.
CollegeInvest Direct Portfolio College Savings Plan
The team of Ascensus Broker Dealer Services, Inc.; Ascensus College Savings Recordkeeping Services LLC; and The Vanguard Group manages this plan, which is sold directly to investors, not through a financial advisor. There are three age-based options that vary by risk: The aggressive one invests more in stocks, the conservative one puts more assets in bonds and short-term investments, and the moderate one is in the middle in terms of risk vs. reward. Over time, as the beneficiary gets closer to college-age, all three age-based options become more conservative, with all or the majority of assets shifted into bonds or short-term reserves. There are also five blended and three individual portfolios investors can put their money into, also with different degrees of risk. The division of plan money among these portfolios does not automatically change as the beneficiary ages. The assets in this plan are all invested in Vanguard funds.
Scholars Choice College Savings Program
This plan is sold through a financial advisor and offers several options: The age-based and years-to-enrollment options automatically change the mix of investments to become more conservative as the beneficiary gets closer to college age. You can also select an account allocation according to risk, from all equities to all cash reserves. And, finally, you can choose from five fund categories: U.S. aggressive equity, U.S. core equity, U.S. small-cap equity, international equity, and global fixed income. All assets in this plan are invested in funds managed by Legg Mason Global Asset Management.
CollegeInvest Smart Choice College Savings Plan
This direct-sold plan offers two options through FirstBank: a one-year time savings account and a money market savings account. Contributions to this plan of up to $250,000 are guaranteed by the Federal Deposit Insurance Corp.
CollegeInvest Stable Value Plus College Savings Plan
This direct-sold plan offers a single option: a stable-value investment managed by Nationwide. This plan guarantees a minimum rate of return that changes annually; for 2019 and 2020, the rate of return is 2.49% net of fees. The rate of return is reset on December 1 of each year and will not go below 1.5% before fees. All plans are subject to fees. Unless otherwise stated, returns are not guaranteed, and investments made in the plans could lose money.
529 Plans vs. Other Savings Accounts
Colorado residents trying to decide whether they should use a Colorado 529 plan or other savings vehicles need to account for the potential savings of a state income tax deduction. While the deduction is attractive, it may not offset the benefits of using other, nondeductible accounts, such as a Coverdell Education Savings Account or Uniform Transfers to Minors or Uniform Gifts to Minors custodial account. Talk to your financial advisor or a similar professional about which plan is likely to give you the greatest benefit.
Matching Grants and Scholarships
Colorado also offers a Matching Grant Program for lower- and middle-income families. The program provides a dollar-for-dollar match of up to $500 in contributions to accounts with an eligible beneficiary. The application period for the 2021-22 program begins on October 18, 2021. The CollegeInvest 529 Scholarship program, which is intended for middle-income families, provides a $2,000 scholarship to any eligible full-time student at a college or vocational school who:
Is a Colorado resident.Has maintained or has had a parent or guardian maintain a CollegeInvest account with a minimum balance of $2,000 for at least four years.Can substantiate an expected family contribution (EFC) toward higher education of up to $45,000 and can not receive a Federal Pell Grant.
Gift Tax Exemption
Colorado residents can contribute $75,000 in one year ($150,000 for a married couple filing jointly) per beneficiary without incurring a federal gift tax. However, the donor or donors can not make any additional gifts to that beneficiary for five years. Alternatively, a single donor can give up to $15,000 a year every year—and a married couple can contribute up to $30,000—without incurring the gift tax.
Unqualified Withdrawals
Any plan withdrawals that are used for something other than qualified education expenses are subject to federal and state income taxes as well as a 10% federal tax penalty.
