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PA 529 plan - tax benefits
Old 11-28-2022, 08:14 PM   #1
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PA 529 plan - tax benefits

(Currently have no 529. Have 2 kids - 14 and 10)

https://www.pa529.com/pdf/ip/IP-Enrollment-Guide.pdf

"STATE TAX DEDUCTION
Pennsylvania taxpayers can deduct contributions to the PA 529 IP from their Pennsylvania taxable income up to $16,000 per beneficiary, per year. For married couples, contributions up to $32,000 per beneficiary, per year, are deductible, provided each spouse has taxable income of at least $16,000."

Was hoping someone would verify my layman's definition.....

I have no W-2 or "earned income".

Between rents, Treasury/CD interest, dividends, cap gains, etc......let's say my income is $100,000. PA has a flat-tax rate of 3.07% on all income.

So on $100,000 I'd pay $3,070 in PA income tax.

However. me and DW contribute a total of $64,000 a year (32k per kid).

Does that mean I save the 3.07% on the $64.000?

Almost sounds too good to be true in that - - it's already an automative 3.07% return on investment .....

Would appreciate any opinions. Thanks
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Old 11-28-2022, 10:00 PM   #2
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Your understanding is generally correct. However each person individually must have sufficient PA taxable income to cover their individual 529 contributions. Meaning that person is the owner of the income. If the rental property is in one name, that income is only attributable to that person. Same with capital gains and other income sources. Since Treasury interest is not taxable by PA, it would not count as income for 529 plan purposes.
It can make a big difference who has title to the account/property.

Also, the 529 deduction applies to contributions to any 529 plan regardless of what state sponsor the plan. I used the Utah plan starting in 2002 for my sons, at the time I did not like the PA plan investment options.

If you take a non-qualifying withdrawal, PA uses the cost recovery system to determine if any of the withdrawal would be taxable by PA.

About five years ago, I researched if there was a minimum time the funds needed to be in the 529, plan. PA has no minimum holding period (each plan may have different periods) as regard to the state tax deduction.
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Old 11-28-2022, 10:03 PM   #3
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529s are supposed to be nice tax advantaged vehicles for education savings.

Yes, it sounds like you'd save the PA income tax on whatever you chose to contribute. (That's also how it works in my state.) You'd also get tax-deferred growth, and tax-free distributions if used for qualified educational expenses.

There is a wrinkle there in your quote - I don't know how PA apportions income between spouses. Presumably you'd need $32K of taxable income with your SSN on it, and $32K of taxable income with your wife's SSN on it. Maybe that's true for you, maybe it isn't.

Drawbacks of 529s? Not too many, really. If you withdraw it for things other than qualified education expenses, then there are some taxes and penalties on the earnings portion. Sometimes the expense ratios of the investments in the 529 are a bit high, and sometimes the investment options are limited. I'd look to see what the PA plan offers investment-wise before committing.

If you save too much in a 529, then you can pass it to grandkids in a sort of educational dynasty trust, or your kids can use it for grad school, or you can just distribute the money and pay some taxes.
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Old 11-29-2022, 04:11 AM   #4
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We live in PA and use four PA 529 accounts and one Utah 529 account for our three grandkids and a niece and nephew who lost their dad. We started early for all the kids and currently contribute about $30k total each year. We easily have that much in taxable capital gains, dividends and interest, but most of our income (all retirement income) is not taxable in PA.
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