DENVER — Whether it's TurboTax, your accountant, or the do-it-yourself form, one of the questions on your Colorado state taxes has to do with contributions to a 529 college savings account. So what is it? How does it work? And what are the benefits?
The state of Colorado has a nonprofit program called CollegeInvest, where you can sign up to open a 529 savings plan for free to save for college. Every dollar you contribute, you can deduct from your state taxes. That money then grows over time, as the interest compounds, and after high school, that money can be pulled out tax-free to pay for educational expenses.
“We’ve done the calculations. And by the simple principle of earning interest, compound interest, you can literally cut the cost of college in half when you compare it to paying interest on a loan,” CollegeInvest CEO Angela Baier said. “So the earlier you save, and the more you save, the better it is for your child, and the fewer loans, if any, they're going to have to take out.”
There are four plans, at varying levels of risk, and account holders can choose for their money to be invested in. That money is eligible for a tax deduction when it’s contributed, grows tax-free, and then can be withdrawn after high school tax-free to pay for things like tuition, room and board, books, laptops, and more.
“In a regular savings account, you don't get the deduction from your state taxes. In a regular savings account, you’re paying federal taxes on your earnings every single year,” Baier explained.
And the state wants people to save and save early. That’s where an incentive comes in. Parents of kids born in the State of Colorado after 2020 have the option to utilize the First Step program.
“Once you sign up, we'll put $100 into your account directly. And after that, we will incentivize a match of $500 a year for five years. So that's $2,600 of free money that will help grow,” she added.
While the account is for a specific child, and eligible for tax deductions on a parent’s taxes, anyone can contribute to your child’s account and be eligible for their own tax deduction.
Signing up for CollegeInvest and First Step are both free. More information on both can be found at Collegeinvest.org.
