As a wealth advisor, it is our priority to guide clients towards financial opportunities that can impact their futures. The Colorado First Step program is one such initiative that merits attention. This innovative program is designed to kickstart savings for Colorado’s children by providing an initial contribution as well as matching contributions for five years.
What is Colorado First Step?
Colorado First Step is a program aimed at encouraging college savings for newborns in the state of Colorado. Here are the key features of the program:
- Automatic Contribution: The program provides a $100 contribution to a CollegeInvest 529 college savings account for every baby born or adopted in Colorado starting January 1, 2020. This initial contribution is designed to kickstart savings for future educational expenses.
- Eligibility: To be eligible for the $100 contribution, the child must be a Colorado resident and the account must be opened within the year of the child’s birth or adoption.
- Parents or guardians need to open a CollegeInvest 529 account to receive the contribution.
- Matching: Colorado will match parent’s future contributions dollar-for-dollar, up to $500 per year for the next 5 years.
- You must apply for First Step by 12/31/2024 to receive the match.
- Encouraging Education Savings: The goal of Colorado First Step is to encourage families to start saving early for their child’s higher education, promoting financial preparedness and reducing future student debt.
What is a 529 Plan?
A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. Named after Section 529 of the Internal Revenue Code, these plans are sponsored by states, state agencies, or educational institutions. There are two types of 529 plans:
- College Savings Plans: These allow you to save and invest for future education expenses. The funds can be used to pay for tuition, fees, room and board, and other qualified expenses at most accredited colleges, universities, and technical schools.
- Prepaid Tuition Plans: These let you lock in future tuition rates at today’s prices. They are typically limited to state residents and may be used for tuition and mandatory fees at in-state public colleges and universities. Some plans also offer options for private or out-of-state schools.
Key Features of 529 Plans:
- Eligibility: Most 529 plans require an account owner and beneficiary to be a U.S. Citizen or a resident alien with a Social Security Number or Individual Taxpayer Number. Non-U.S. Citizens living outside the U.S. may still contribute to a child’s 529 plan that someone else owns.
- Tax Benefits: Contributions to a 529 plan grow tax-deferred, and withdrawals for qualified education expenses are tax-free at the federal level. Some states also offer tax deductions or credits for contributions. By opening a 529 plan in your state of residence, you can take advantage of state-specific tax benefits, such as deductions or credits.
- Flexibility: Funds can be used at eligible institutions nationwide and some abroad. You can change the beneficiary to another family member if the original beneficiary doesn’t need the funds.
- High Contribution Limits: Many 529 plans have high maximum contribution limits, often over $300,000.
- Control: The account owner retains control over the funds, even after the beneficiary reaches legal age.
- Low Impact on Financial Aid: 529 plan assets are considered parental assets in the federal financial aid formula, which typically has a smaller impact on aid eligibility compared to student-owned assets.
529 plans are a popular choice for parents and grandparents looking to save for a child’s future education expenses due to these advantages.
What if You Don’t Use All the Money?
- Change the Beneficiary: You can change the beneficiary to another qualifying family member. This includes siblings, first cousins, or even yourself, allowing the funds to be used for another person’s educational expenses.
- Leave the Funds for Future Use: You can keep the money in the account in case the original beneficiary decides to pursue further education later, such as graduate school or another degree.
- Use for Non-Qualified Expenses: You can withdraw the money for non-qualified expenses, but you will have to pay income tax on the earnings portion of the withdrawal, as well as a 10% penalty. The principal amount (your contributions) is not subject to tax or penalty.
- Transfer to Another 529 Plan: You can roll over the funds into another 529 plan for a different beneficiary without tax consequences, as long as the new beneficiary is a family member of the current beneficiary.
- Pay for K-12 Education: Some 529 plans allow up to $10,000 per year per beneficiary to be used for K-12 tuition at public, private, or religious schools.
- Repay Student Loans: Under the SECURE Act, you can use up to $10,000 from a 529 plan to pay off student loans for the beneficiary or their siblings.
- Educational Expenses for Special Needs: Funds can also be used for certain expenses for special needs beneficiaries, which may not be classified as traditional educational expenses.
- Roll Over to Roth IRA: As of 2024, the SECURE 2.0 Act allows the owners of 529 plans to roll up to $35,000 of unused funds into the beneficiary’s Roth IRA, assuming certain qualifications are met. Keep in mind that there is an annual limit that will require owners to roll over the funds in smaller amounts over time, with $35,000 being the lifetime limit.
These options provide flexibility in managing unused 529 plan funds, helping to ensure that the money can still benefit the account holder or their family members in various ways.
To learn more, reach out to GHP Investment Advisors. If you’re not already working with GHPIA, contact us.
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