I wanted to make sure all of my clients are aware of the Colorado First Step Program, which is a program designed to kickstart college savings.  Any child born or adopted after 1/1/20 in Colorado can receive a free $100 contribution from the state of Colorado to a Colorado CollegeInvest 529 Savings* account.  Even better, once you open a CollegeInvest account via the First Step program, you can also participate in the Matching Grant program.  This program matches your contributions to your CollegeInvest account dollar-for-dollar, up to $1,000 per year for 5 years!  This means you could get up to $5,000 in matching contributions from the state of Colorado.   There are no income limits on this program. Even if you don’t have young children, you likely have other children (grandchildren, nieces and nephews, family friends, etc.) in your life who could benefit from this program.

Almost makes me want to have another baby to get the $5,000 match…just kidding!!!

For more information and to sign up for the First Step program, visit the CollegeInvest First Step page here: https://www.collegeinvest.org/first-step/  

Children born before 1/1/20

There is also a separate CollegeInvest Matching Grant program for children born before 1/1/20.  There are more restrictions, including income limits, with this program. CollegeInvest doesn’t really advertise this program as much as the First Step program, but all of the details are available on their website here: https://www.collegeinvest.org/matching-grant-program/ The child must be 8 years old or younger to apply for the first time to the program. I have utilized this program for my children so I’m pretty familiar with it.

CollegeInvest business contributions

CollegeInvest also has a program that allows an employer to make contributions to a Colorado 529 plan owned by an employee, and the employer receives a Colorado tax credit of 20% of the contribution. CollegeInvest states that this is available when the employer and employee are the same i.e. a small business owner/self-employed person. The maximum contribution that qualifies for this tax credit is $2,500 (providing a $500 Colorado tax credit). I am currently reviewing the mechanics of how this could work for my business owner clients.

Tax Planning Opportunities with 529 Plans – kids who are already in college (or close to it)

There are many tax planning strategies available when utilizing 529 plans for college savings. I wanted to highlight an opportunity here for those that are Colorado residents and already have college-age students.

Even if you have a child that is currently in college and not much time to benefit from potential tax-free growth of earnings in a 529 account, you can still get a tax benefit from utilizing a 529 plan.  If you are a Colorado resident, you can open a Colorado 529 account, put the money you plan on using for your child’s qualified higher education expenses for the year into that 529 account, then withdraw the money shortly after to pay the education expenses.  You get a Colorado tax deduction for the amounts you put into a CollegeInvest plan.  The Colorado tax rate is currently 4.5%.  You essentially give yourself a 4.5% discount on your higher education expenses for the year.

Example: You know you will need to spend $10,000 on your child’s tuition and room and board expenses in Fall 2023.  You are a Colorado resident and have a Colorado tax liability every year.  You deposit $10,000 into a new Colorado 529 account (with your child set as the beneficiary) in June 2023.  You withdraw the same $10,000 from the 529 account in August 2023 to pay your child’s education expenses. You invested the $10,000 in a money market fund and there was no growth/loss during the time it was in the 529 account.  You take a deduction for the $10,000 529 plan contribution on your 2023 Colorado tax return, reducing your Colorado tax liability by $450 ($10,000 x 4.5%).

Please note: if you utilize a 529 plan to pay for college expenses, you cannot count those same expenses towards other college tax benefits, such as the American Opportunity credit or Lifetime Learning credit, as that is considered “double-dipping.”  Also, beginning 1/1/22, the annual Colorado tax deduction for 529 plan contributions is limited to $20,000 per taxpayer per beneficiary, or $30,000 per tax filing, per beneficiary for joint tax return filers.

These are just a few of the potential benefits you could get from using a 529 plan to save for college expenses. If you want to discuss whether saving to a 529 plan makes sense for your family, please reach out to me for a call.

*If you are not familiar with a 529 savings account, it is a type of investment account that is specifically designed to save for higher education expenses.  You can put money into a 529 account and it grows tax-free, then the contribution + earnings can be taken out of the account tax-free if used for higher education expenses.  Many states offer state tax benefits for contributing to their states 529 plan.  Colorado provides for a state tax deduction for contributions made to a Colorado 529 plan.    A great resource for 529 plan information is https://www.savingforcollege.com/

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