Q&A: Why 529 college savings plans are still worthwhile, especially for grandparents

Dear Liz: The state where I live, Oregon, has removed the tax deduction for 529 college savings accounts. This was quite disturbing to discover upon getting my taxes done this year. Other than the obvious savings benefit, are these accounts still worth having? Fortunately our son is almost done with college, so it won’t affect us much, but I am thinking of my two granddaughters.

Answer: Although there’s no federal tax deduction for 529 contributions, most states offer some kind of tax break or other incentive to contribute to their college savings plans. Oregon now offers a tax credit capped at $150 for single filers or $300 for married couples that doesn’t benefit higher earners as much as the previous deduction.

(Some states have no income tax and thus no deductions for 529s, while a few — California, Delaware, Hawaii, Kentucky, Maine, New Jersey and North Carolina — have a state income tax but no 529 tax break.)

College savings plans still allow your money to grow tax-deferred and to be used tax-free for your children’s education. That can be a big benefit for higher-income families, especially when they have young children. (The longer the money has to grow, the bigger the potential tax advantage.)

Grandparents may have additional reasons to contribute. Starting this year, money in a grandparent-owned 529 is completely ignored by federal financial aid formulas. (Although money in a parent-owned 529 has always received favorable financial aid treatment, distributions from a grandparent-owned 529 in the past were heavily penalized.)

So yes, 529 plans are still worthwhile for higher earners — and you’re not limited to your own state’s plan. If you’re not getting a tax incentive to stay home, you have many great options. Morningstar annually updates its list of the best 529 plans and last year singled out Illinois’ Bright Start College Savings, Michigan’s Education Savings Program and Utah’s My529 for top honors.

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  1. Your discussion on the new 2020 Oregon 529 contribution refundable credit missed an important point.
    The income (AGI) determines the percentage of the contributions made during
    the year. If your AGI is at least $0 and not more than $30,000, the refundable credit is 100% of your contribution with a maximum of $150 ($300 if married filing jointly). No income requirement.
    So if your 2 year old child (or any age), with $0 income (or not more that $30,000), receives a gift of $150 from their parent or grandparent, contributes that $150 to a Oregon 529 College Savings account (child does not need to own the account or be the beneficiary), and files an Oregon income tax return, the child can claim a refund of $150.
    And repeat again, in the following years.
    It is like, the State of Oregon wants to give every Oregon child $150 a year for college.