Which 529 Plan Should Pennsylvania Residents Use?
Pennsylvania offers one 529 college savings plan, the Pennsylvania 529 Investment Plan, and one prepaid tuition plan, the Pennsylvania Guaranteed Savings Plan. Since Pennsylvania offers a state income tax deduction for contributions to any 529 plan, residents may consider investing in an out-of-state 529 plan such as the Ohio, New York, Wisconsin or California 529 plans.
However, Pennsylvania residents who invest in a Pennsylvania 529 plan receive an initial $100 seed contribution from the Keystone Scholars Program.
Pennsylvania 529 plan tax benefits
The state of Pennsylvania offers a state income tax deduction for 529 plan contributions up to the amount of the federal gift tax exclusion amount ($15,000 per donor, per beneficiary in 2019). Residents are eligible for the state income tax deduction for contributions to any 529 plan.
Pennsylvania residents may contribute more than this, up to $75,000 in 2019 (up to $150,000 if married), if they treat the contribution as if it were spread evenly over a 5-year period. Grandparents sometimes use this 5-year gift tax averaging as an estate planning strategy. The value of a Pennsylvania 529 plan account is exempt from Pennsylvania inheritance tax.
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, data of birth and SSN or ITIN.
How much can you contribute to a 529 plan in Pennsylvania?
529 plans do not have annual contribution limits, but each state has a maximum aggregate limit based on the full cost of attending an expensive 4-year college in that state. Pennsylvania’s 529 plans accept contributions until all Pennsylvania 529 plans for the same beneficiary reach $511,758.
If contributions are made to another state’s 529 plans for the same beneficiary, the total amount of 529 plan savings cannot exceed the expected cost of the beneficiary’s qualified higher education expenses.
Keystone Scholars Program
Pennsylvania babies born or adopted in 2019 are eligible to receive a $100 contribution to a Child Savings Account (CSA) administered by the Pennsylvania Treasury Department. A Keystone Scholars account can be linked to a Pennsylvania 529 plan or Pennsylvania prepaid tuition account so that parents can track their college savings progress all in one place. Parents must open a Pennsylvania 529 plan before they can use their Keystone Scholars funds.
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
Investments in the Pennsylvania 529 Investment Plan grow on a tax-deferred basis and are not taxed when distributions are used to pay for qualified education expenses. This includes college expenses, such as tuition, books, supplies, equipment and room and board if the student is enrolled on at least a half-time basis, and up to $10,000 per year in K-12 tuition expenses.
Pennsylvania 529 Investment Plan portfolios
The Pennsylvania 529 plan offers 17 investment portfolios managed by the Vanguard Group, which include:
- 3 age-based options (conservative, moderate and aggressive) that are programmed to adjust their level of risk as the beneficiary gets closer to college
- 6 static portfolio options that do not change over time
- 8 individual fund portfolios, including the Social Index Portfolio, which is composed of stocks that have been screened for certain social and economic criteria
Families must select at least one investment portfolio when they open a Pennsylvania 529 plan account. Investment options can be changed twice per year without tax consequences.
Pennsylvania 529 Investment Plan performance
Pennsylvania’s 529 college savings plan ranks 2nd for the 1-year period ended June 30, 2019, according to Savingforcollege.com’s direct-sold 529 plan quarterly performance rankings.
Savingforcollege.com also assigns a 5-Cap Rating to each 529 plan, based on performance, costs, features, reliability and whether or not the plan offers any unique benefits for residents. The Pennsylvania 529 Investment Plan received the following ratings for residents as of June 30, 2019:
Overall 5-Cap Rating
Source: Savingforcollege.com data as of 6/30/2019
Keep in mind, however that this data represents historical performance, which doesn’t necessarily indicate future results.
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