Secrets of the Alabama 529 College Funding Plan

It’s been a while since I’ve written a column espousing the advantages of using a college 529 plan to help fund a college education.  Recently I had a reader contest where I asked readers to submit their best money saving ideas to jump-start 2016.  One reader, Linda W., focused on this topic and it was full of great tips:

Years ago when our children were young, we wanted to open up a college 529 account for them. Alabama was so involved with their prepaid tuition plan that their 529 plan was lacking in growth. It was more beneficial for us to invest in an out-of-state plan and lose the tax benefits offered to those who invest in an Alabama 529.

But, we learned some tricks and this has helped us withdraw some of those funds!

Each year we roll $10,000 over into a College Counts 529 plan here in Alabama. That does two things, it allows us to take the maximum contribution off our Alabama taxes for married couples, saving us about $500, and it allows all the gains on our out-of-state deposits to now be tax-free in Alabama, (one of the few states to tax gains made in an out-of-state 529 account upon withdrawal of funds) because they will be withdrawn for use from an Alabama sponsored fund!

Yes, the funds are managed better, now, in Alabama, and we could let those funds sit in the account, but we usually roll over the funds and withdraw them in less than 30 days to pay college bills. The whole process to move the funds from out-of-state 529, to in-state 529, to the university (via a charge card with cash back for charging tuition and their grace period for making payments!) takes 30 days or less! But the savings are near $1,000!

And we always pay $4,000 college costs out-of-pocket, and not with our 529 funds, to snag the $2,500 cash given to us by the American Opportunities CREDIT (not a deduction which results in less in your pocket!). See federal tax instructions for eligible students, expenses and terms.

In these high tuition and fees time, it helps to maximize ones college savings and these tips might help others who have set up college funds out of state. We started early enough to be able to pull money out gradually for two kids, thus being able to only have to move $10,000 a year. But even rolling over more, if one needs it, and thus going over Alabama’s annual deduction limit, you still receive the benefit of tax-free withdrawals to pay qualified college expenses.

And if you have no savings for college at all, still open up an Alabama College Counts 529 as you can send your child’s tuition payment there, let it sit for a day, then pull it out and pay the university, or in most cases, your charge bill where you charged their tuition. This will count as a contribution to the 529 account and allow you to take the Alabama tax deduction! Just read up on the process of depositing and withdrawing so there are no surprises!

So there! My tips for saving a lot with a little effort!

Of course one should consult their tax advisor to confirm the benefits based on their individual status. But these have worked for me and the friends I have helped with their taxes! 

My comments:  The $10,000 State of Alabama income tax deduction that Linda refers to is based on a married couple filing jointly.  For single filers, the deduction is $5,000.  Also, when doing a rollover from a 529 plan, be aware that you are allowed only one rollover every twelve months so plan accordingly.

I would add that the 529 plan is, in most cases, the best way to save for college.  While you don’t get a federal tax deduction for contributions (and State of Alabama income tax deduction is limited to Alabama residents and limited in the amount of deduction each year), your money grows tax deferred and, when withdrawn for qualified education expenses, it’s tax free.  You should also be aware that there are two versions of the Alabama 529 plan; an Advisor version where you’ll pay commissions and a ‘self-help’ version with no commissions.  For more information visit College Counts 529 Plan.  Thank you, Linda for a very thoughtful commentary on 529 plans.