January 30, 2019

The Tax Benefits of a ScholarShare 529 Plan

scholarShare529

February 2019

Tax season is the perfect time to spotlight the importance of including college savings as part of an overall savings strategy, and why ScholarShare 529, the California college savings plan, is the ideal program.

ScholarShare 529 is the California state-sponsored, tax-advantaged 529 college savings plan. Earnings in a ScholarShare 529 plan grow free from Federal tax. Paying fewer taxes translates to more earnings, allowing the account to grow that much faster — giving the beneficiary an even bigger head start.

ScholarShare 529, offers many tax benefits to its consumers, and combined with 19 low cost investment options to choose from, it’s an attractive saving option for future higher education expenses. Additionally, a ScholarShare 529 plan is a smart and easy way to invest a tax refund. A portion, or all, can go directly into a 529 account, making it possible to reach established savings goals that much easier and faster.

This is especially important for Latinos. Despite the fact Latinos value a higher education more than any other demographic group, only about 8% of Latinos in California are saving for college.1 The tax benefits of a ScholarShare 529 plan provide an appealing saving option for Latino customers.

What Are the Tax Benefits Associated with a ScholarShare 529 Plan?

Federal Income Tax Benefits

As a 529 Plan, ScholarShare 529 offers unsurpassed income tax benefits as any investment
earnings can grow tax-deferred. Although contributions are not deductible on your federal tax return, distributions to pay for a beneficiary’s qualified higher education expenses and outgoing rollovers to other qualified 529 plans and Section 529A ABLE accounts ARE free from federal tax.

State Income Tax Benefits

In addition to federal tax benefits, there are state tax benefits as well. For California taxpayers, while contributions are not deductible for California income tax purposes, earnings accrue free of state income tax. Any withdrawals used for qualified higher education expenses and outgoing rollovers to other qualified 529 plans ARE ALSO free from state income tax.

Estate Tax Planning Benefits

There’s another tax advantage unique to the 529 plan. There’s no federal gift tax on
contributions up to $15,000 per year for single filers and $30,000 for married filers. There’s even an option to gift amounts up to $75,000 for single filers and up to $150,000 for married filers if pro-rated over 5 years. This means you could make a one-time gift equivalent to the 5-year amount and it could all qualify for the federal gift tax exclusion. As always, benefits vary based on an individual’s financial circumstances.

The chart below is an example of how the tax benefits of a ScholarShare 529 account provide an advantage

 scholarshare 529 pic 2

Why Recommend Investing This Year’s Tax Refund in a ScholarShare 529 Plan?

While many people look forward to receiving their tax refund to purchase a new retail item, it is a perfect opportunity to instead direct all or part of their refund to jump-start or boost their ScholarShare 529 college savings plan.

Regular deposits are a fantastic way to save for higher education expenses and consistently grow an account, however, a one-time upfront lump sum contribution is more likely to benefit from potential market gains over the long-term than smaller recurring contributions.

Today, it’s even easier to make that transaction happen from a STATE Tax refund. There is no need to wait for the refund to arrive in order to then make a deposit into a 529 Account. It can be done directly when filing STATE Taxes by following these 3 steps:

  • Complete the REFUND or NO AMOUNT DUE section, Line 115, of CA Form 540 to authorize Direct Deposit (Line 28 of CA Form 540 2EZ).
  • Provide the ScholarShare Routing Number (011000028)
  • Provide the ScholarShare account number in the following format (1) “CA” as prefix, (2) the 4-digit investment portfolio number, and (3) the ScholarShare account number (for account numbers less than 11-digits, you add leading zeroes.

Complete instructions are available in the instructions for form 540.

For more information about ScholarShare 529, its investment options, current offers and more, visit our web page in Spanish at  www.scholarshare-espanol.com or in English at www.scholarshare529.com or reach out to Julio Cesar Lugo, ScholarShare 529 Plan Consultant at 858-888-4016 or JulioCesar.Lugo@tiaa.org

To learn more about The ScholarShare 529 College Savings Plan, its investment objectives, tax benefits, risks, and costs please see the Disclosure Booklet at ScholarShare529.com. Read it carefully. Investments in the Plan are neither insured nor guaranteed and there is the risk of investment loss. Check with your home state to learn if it offers tax or other benefits such as financial aid, scholarship funds or protection from creditors for investing in its own 529 plan. If the funds aren't used for qualified education higher expenses, a 10% penalty tax on earnings (as well as federal and state income taxes) may apply. Neither TIAA-CREF Tuition Financing, Inc., nor its aliates, are responsible for the content found on any external website links contained herein. TIAA-CREF Individual & Institutional Services, LLC, Member FINRA and SIPC, distributor and underwriter for the ScholarShare529 College Savings Plan.

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