Colorado 529 Plan Basics

While we are providing general information about the state’s 529 plan, please consult the Plan Description and Participation Agreement for more detailed information and facts about the plan.

A 529 plan is a savings plan that encourages education savings for qualified higher education expenses: college, vocational, or other post-secondary learning. 529 plan funds can also go to private high school or K-12 tuition at a qualified tuition program.

Unlike a traditional savings account or bank account, your money grows tax-deferred in a 529 account and qualified distributions are federal tax and state tax free.

Different states have different state plans with different investment options and different tax benefits. They will also have different minimum contribution (and subsequent contribution) requirements and plan fees. You are not required to open a 529 plan in your home state. You can open a 529 plan in any state that accepts out-of-state enrollments.

Colorado has 4 state plans: the CollegeInvest 529 College Savings Plan, the Scholar’s Choice Education Savings Plan, the SmartChoice College Savings Plan, and the Stable Value Plus College Savings Program.

The CollegeInvest Plan (or Colorado 529 College Savings Plan) is a direct-sold plan. This plan has a low, flat fee across all portfolio options at 0.34%. It does not require in-state residency, but Colorado residents get a great tax break.

Ascensus Broker Dealer Services, Inc. and The Vanguard Group manages the Colorado 529 College Savings Plan. It features age-based and static portfolio options utilizing Vanguard mutual funds. Accounts can be linked to the Upromise rewards

The Scholars Choice Education Savings Plan is an advisor-sold plan with fees ranging from 0.30% – 1.75% depending on share class. This plan does not require residency and comes with the guidance of a financial expert, but may also come with higher fees than a direct-sold plan. The plan features a lineup of enrollment-year-based, static multi-fund, and individual fund portfolio options. The plan is managed by TIAA-CREF Tuition Financing and distributed by Nuveen.

The SmartChoice College Savings Plan is a direct-sold plan that comes with 0.71% fees and does not require residency. This option is FDIC insured. Colorado’s Smart Choice College Savings Plan offers two different FDIC-insured options through FirstBank: a one-year time savings account or a money market savings account.

The final plan offered by Colorado is the CollegeInvest Stable Value Plus College Savings Plan. Created in 2003, it was designed to protect principal and guarantee a minimum annual rate of return under a funding agreement with Nationwide.

Any of these 529 plans can be linked to the Upromise rewards service. Earn an extra $25 bonus when you connect a 529 account to your Upromise profile.

What are some Colorado 529 plan benefits and tax advantages?

Funds you invest in a 529 plan grow tax-deferred. And funds that the student eventually withdraws from the plan towards qualified educational costs are free from federal taxes.

A common misconception is that these 529 plan assets will disqualify your child from financial aid. On the contrary, 529 plan funds are treated more favorably in the financial aid formula than other savings in your child’s name through a custodial account such as an UTMA/UGMA. This is because assets in a child’s 529 plan belong to the parent not child, and FAFSA (Free Application for Federal Student Aid) gives preferential tax treatment to assets belonging to a student’s parent versus the student.

If your child is an Einstein or football star, and manages to score a free ride to school, you can still repurpose those funds. You can take out an amount equal to the scholarship fund amount from the 529 plan without incurring the 10% penalty tax fee you’d normally have to pay on funds not going to qualified education costs. (You would have to pay regular ordinary income taxes on earnings, but there would be no penalty. Alternatively, you can leave the funds in a 529 plan to be used at a later date by this beneficiary or a direct relative of the original beneficiary.)

And for many, a 529 plan can be used to transfer wealth. Contributing to a 529 plan lets grandparents or other contributors reduce the size of their taxable estate while helping them fund a grandchild’s or family member’s education. It’s even possible to make five years worth of contributions in a single year, up to $85,000 (or $170,000 for married couples) and still get the gift tax exclusion.

Is a 529 plan tax deductible in the state of Colorado?

Yes, Colorado taxpayers can claim a state deduction.Previously unlimited, caps were put in place in June 2021.

The Colorado State Legislature passed a June 2021 bill that places an annual cap on the state income tax deduction for 529 plan contributions based on filing status. There is is a per taxpayer/per-beneficiary cap of $20,700 annually for single filers. For joint filers, there is per taxpayer/per-beneficiary cap of $31,000 annually.

What happens to a Colorado 529 Plan if not used?

There is no time in which the funds within a Colorado 529 plan need to be withdrawn. Unused funds can remain in the account and continue to grow tax-deferred.The account owner may also choose to change the beneficiary, without penalty, to another individual with a social security number who is a member of the original beneficiary’s family and a United States citizen. This is not limited to immediate family members; funds can be transferred to cousins, nieces, nephews, and other close relatives. The account owner can close the account if not used, but funds in the account will be subject to federal and state income tax as well as a 10% penalty on the account earnings.

And as outlined earlier in this article, 529 plans allow the account owner to withdraw the amount a beneficiary receives in scholarships without incurring the 10% penalty.

Can a Colorado 529 Plan lose money?

Yes, a 529 plan is an investment plan with different types of investment options. The investment options offer different levels of market risk.

Colorado does offer an FDIC insured plan when you choose the SmartChoice College Savings Plan. Other plans, similarly to mutual funds, stocks, and bonds, are not FDIC insured.

Speak with a qualified financial advisor about your financial goals and different investment portfolio options.

Do I need a Colorado 529 Plan for every child?

You don’t need a Colorado 529 plan for each child but you may find it easier to administer if you do. You can only have one named beneficiary on a Colorado 529 plan. The risk and mix of equities to fixed income of certain investment options is determined by the age of the beneficiary. For this reason, you may want to have a different 529 plan for each child.

You may be interested to know that multiple people can open accounts for the same beneficiary.

Can a Colorado 529 plan be used to pay off student loans, apprenticeships, and K-12 private schools?

529 plan funds can be used towards apprenticeships, however K-12 expenses and student loans are considered non-qualified expenses. Withdrawals for K-12 expense or student loans are subject to tax penalties.

How do financial aid and scholarships affect a Colorado 529 plan?

A 529 plan can affect financial aid, but the impact is dependent on the account owner and their tax situation, not the beneficiary.

If the account is held by the parent or guardian of the student, funds within are considered parental assets. Approximately the first $10,000 of parental assets do not affect the Expected Family Contribution calculation. For a greater than $10,000 amount, a maximum of only 5.64% is counted, which is incredibly favorable. However, if the 529 plan is held by a grandparent or extended family member, while it is not taken into account for the FAFSA, distributions from these accounts qualify as student income, which is assessed at 50% and can harm the student’s eligibility for financial aid.

529 accounts do not affect merit-based scholarships. Other scholarships may depend based on the school.

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529 Plan Basics by State

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