Pennsylvania residents have two main education savings options: the Pennsylvania Guaranteed Savings Plan (GSP) and the Pennsylvania 529 Investment Plan. Both state plans offer unique benefits, and considering your home state’s offerings is crucial in the decision process.
However, as Pennsylvania provides a state income tax deduction for contributions to any 529 plan, residents might also explore out-of-state options offered by New York, Utah, or nationally offered plans by investment firms such as Vanguard or T. Rowe Price.
Pennsylvania 529 plan tax benefits
The Keystone State is generous in helping its residents save for college education costs. Notably, those who invest in a Pennsylvania 529 plan receive an initial $100 seed contribution from the Keystone Scholars Program.
Moreover, Pennsylvania provides a tax benefit through a state income tax deduction for 529 plan contributions. This deduction can be up to the federal gift tax exclusion of $17,000 per donor per beneficiary in 2023. This tax-advantaged feature applies to any 529 plan, not just those offered by Pennsylvania.
There’s more good news for high-income filers. In 2023, you can contribute up to $85,000 (or $170,000 if married) by spreading the contribution evenly over a five-year period, a technique often employed by grandparents for estate planning. Furthermore, the value of a Pennsylvania 529 plan account is exempt from Pennsylvania inheritance tax, further enhancing its attractiveness as a financial aid tool.
How to enroll in a Pennsylvania college savings plan
The Pennsylvania 529 Investment Plan and the Pennsylvania Guaranteed Savings Plan can be opened online by a parent, grandparent, or anyone saving for a beneficiary’s education.
Each plan’s application will ask for the 529 plan account owner’s name, Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN), date of birth, mailing address, telephone number and email address, and the beneficiary’s name, date of birth and SSN or ITIN.
How much can you contribute to a 529 plan in Pennsylvania?
While 529 plans don’t have annual contribution limits, each state sets a maximum aggregate limit based on the total cost of attending an expensive 4-year college in that state. For Pennsylvania, this limit is currently $511,758 across all PA 529 plans for the same beneficiary.
If contributions are made to another state’s 529 plan, like Nevada’s Vanguard-managed plan — renowned by Morningstar for its low maintenance fee and broad allocation of mutual funds — the total savings cannot exceed the expected cost of the beneficiary’s higher education expenses.
Keystone Scholars Program
Newborns or babies adopted in Pennsylvania in 2019 qualify for a $100 contribution to a Child Savings Account (CSA) administered by the Pennsylvania Treasury Department. The Keystone Scholars account can be linked to the PA 529 GSP or PA 529 Investment Plan. Parents must open an account with one of the Pennsylvania 529 plans to utilize these funds. This setup allows parents to track their college savings progress in one place.
How Pennsylvania’s prepaid tuition plan works
With the Pennsylvania Guaranteed Savings Plan, families can prepay for future tuition costs at today’s rates. The plan allows investors to select a goal, or tuition level, based on the costs of community colleges, in-state colleges, and private colleges in Pennsylvania.
How the Pennsylvania 529 Investment Plan works
The PA 529 Investment Plan works by growing your investments on a tax-deferred basis. This means earnings are not subject to income tax while remaining in the account. Moreover, distributions are also tax-free when used for qualified education expenses. These can range from college costs such as tuition, books, supplies, and room and board (provided the student is enrolled at least half-time) to up to $10,000 per year in K-12 tuition expenses. To take advantage of these benefits, you can open an account now.
Pennsylvania 529 Investment Plan portfolios
The Pennsylvania 529 plan offers various investment portfolios managed by the Vanguard Group, which include:
- Year-of-enrollment options programmed to adjust their level of risk as the beneficiary gets closer to college
- Static portfolio options that do not change over time
- Individual fund portfolios, including the Social Index Portfolio, which is composed of stocks that have been screened for specific social and economic criteria
Families must select at least one investment portfolio when they open a Pennsylvania 529 plan account. You can change investment options twice per year without tax consequences.
Pennsylvania 529 Investment Plan performance
Pennsylvania’s 529 college savings plan ranks 39th for the one-year performance ending in Q2 2023, according to Savingforcollege.com’s direct-sold 529 plan quarterly performance rankings.
Savingforcollege.com assigns a 5-Cap Rating to each 529 plan based on performance, costs, features, reliability, and whether the plan offers unique resident benefits. The Pennsylvania 529 Investment Plan received a rating of 4.5 out of 5 caps for residents as of May 12, 2023.
Keep in mind, however that this data represents historical performance, which doesn’t necessarily indicate future results.
Pennsylvania’s 529 plans offer a sound strategy for securing your child’s education. The Keystone Scholars Program kickstarts savings for newborns, while the Guaranteed Savings Plan lets you prepay tuition at today’s rates. The 529 Investment Plan allows tax-deferred growth and tax-free withdrawals for qualified expenses. However, consult a financial advisor before enrollment to answer any questions and help you choose the best plan for your needs.