Reduce Your Taxes & Save for College, the Ultimate Win-Win
If you are like everyone else you want to pay as little in taxes as possible. There are all kinds of deductions and tax credits available on your federal tax return. But what about your state taxes? Unless you live in one of the seven states that doesn't have a state income tax your income will be taxed by the state you live in.
Each state has a 529 college savings program and these operate very similar to a 401K or IRA but instead for retirement the goal is to save for higher education costs. I live in Indiana and many other states like Indiana have 529 accounts you can contribute to and get a state tax credit. This is a reduction in the tax you pay. Indiana allows up to 20% of your contributions to the Indiana 529 account to earn a state tax credit up to $1,000. So if you contribute $5,000 to a 529 account you will pay $1,000 less in taxes. Of course you can always contribute more than $5,000 but beyond the $5,000 annual contribution you will not receive further tax benefit. So a $5,000 investment only costs you $4,000.
The other great thing about the 529 account is it doesn't have to be for your own child. It could be for grandchildren, it can be for nieces and nephews, brothers and sisters, an immediate family member and their decendents. The beneficiary of the college fund doesn't have to live in Indiana either. My nieces live in South Carolina but I contribute a small amount to an Indiana 529 account on their birthdays and Christmas.
The flexibility of these accounts are appealing. They can be used for trade schools, community college, traditional universities, or graduate school. Check out www.savingforcollege.com to find the 529 provider in your state and for other resources to help you determine if opening a 529 account will work for you.