Parents, grandparents, and even future students often want to know the best way to save towards future educational expenses. While you can utilize any normal interest bearing bank account or taxable investment account, you may want to consider using a tax-advantaged 529 account for educational savings and investing.
How to Invest for College in Pennsylvania
You can invest for college and other eligible educational expenses in Pennsylvania by opening a 529 account for a beneficiary. As the account holder, you control how and when the assets are distributed.
Tax Benefits of Investing in 529 as a Pennsylvania (PA) Resident
Earnings are federal income tax-free – 529 investment earnings grow tax-deferred and when used for qualified education expenses are federal income tax-free.
Earnings grow state income tax-free – 529 investment earnings grow tax-deferred and when used for qualified education expenses are state income tax-free for Pennsylvania residents.
Pennsylvania state income tax deduction – In 2023, Pennsylvania taxpayers may deduct up to $17,000 in contributions per beneficiary per year or up to $34,000 per beneficiary if married filing jointly when each spouse has income of at least $17,000. 529 contributions can reduce your Pennsylvania state income taxes.
Gift and Inheritance Benefits of a 529 in Pennsylvania
Federal gift tax – You can contribute up to $85,000 in a single year ($170,000 for a married couple filing jointly) for each beneficiary without incurring federal gift taxes. The amount contributed is prorated over 5 years so, for example, a $170,000 contribution would use up all of the $34,000 annual gift tax exclusion each year for 5 years.
Federal estate tax – When you contribute to a 529, it is considered a completed gift to the named beneficiary and is not included in your estate for federal estate tax purposes. However, if you choose to take advantage of the federal gift tax averaging option mentioned above and you die within five years of contributing, a prorated portion of the contribution will be subject to federal estate tax, if applicable.
Pennsylvania inheritance tax – Funds in the account are exempt from Pennsylvania inheritance tax. Depending on the relationship between the deceased account owner and the heirs, this can be a savings of up to 15% of the entire value of the account.
What can you do with an unused 529 balance?
If you end up with unused funds for a beneficiary, you have the following options:
The account holder can transfer the funds to another beneficiary.
The beneficiary can roll the funds to their Roth IRA if they meet the requirements.1
The account holder can distribute funds to either the account holder or beneficiary for non-qualified reasons and pay 10% penalty and federal/state income tax on the portion of earnings that is withdrawn.
If you are a Pennsylvania resident, and are interested in establishing a 529 plan, you can do so at PA529 or through another state-sponsored plan.
The One Day In July office in Wayne, PA provides investment management services as fee-only fiduciary financial advisors to the greater Philadelphia area, the Main Line, and surrounding communities including Villanova, Radnor, St. Davids, Wayne, Strafford, Chesterbrook, Devon, Berwyn, Paoli, Malvern, King of Prussia, Valley Forge, Havertown, and more.
If you would like to invest in a 529 college savings account, contact us today to set up a free consultation. We can meet in person if you're in the area or set up a phone call or Zoom meeting if you prefer.
