How Indiana’s 529 College Fund Plan Works

A 529 plan, authorized by Section 529 of the Internal Revenue Code, is a savings account designed for future education costs. Indiana provides its own distinct program, the CollegeChoice 529 Direct Savings Plan, which comes with unique benefits for its residents. This plan allows individuals to invest money that grows with tax-deferred earnings. Funds can be withdrawn tax-free for a wide range of qualified educational expenses.

Indiana’s 529 Plan Tax Advantages

A significant incentive for using Indiana’s CollegeChoice 529 plan is the state-specific tax credit for Indiana taxpayers. Contributors can receive a 20% state income tax credit on their contributions, up to a maximum credit of $1,500 per year ($750 for married couples filing separately). This applies to contributions up to $7,500 annually, and contributions for a given tax year can be made until the tax filing deadline of the following year.

Beyond the state credit, the plan aligns with federal tax benefits common to all 529 plans. Investments within the account grow on a tax-deferred basis, shielding earnings from annual taxes. When the funds are eventually used, withdrawals are entirely tax-free at both the federal and state levels, provided they are used for qualified education expenses.

The plan also offers certain estate and gift tax benefits. Contributions to a 529 account are considered completed gifts for federal tax purposes. Under federal law, an individual can contribute up to $19,000 per year to any number of individuals without incurring gift taxes. A special rule for 529 plans allows for an accelerated gift of up to five years’ worth of contributions at once. This means a single contributor can make a lump-sum contribution of up to $95,000 per beneficiary—or $190,000 for a married couple filing jointly—and have it treated as if it were made over a five-year period for gift tax purposes.

Establishing an Indiana 529 Account

Opening an Indiana CollegeChoice 529 account requires gathering specific information for both the account owner and the designated beneficiary. Federal law mandates the collection of personal details, including full name, permanent street address, date of birth, and Social Security Number for both individuals. A P.O. Box is not an acceptable address.

During the application process, prospective account owners must select an investment portfolio. The Indiana plan offers several strategies, including age-based portfolios that automatically shift to more conservative investments as the beneficiary gets closer to college age. There are also static portfolios, which maintain a fixed allocation, and individual fund portfolios for those who prefer to build their own investment mix.

Another decision involves designating a successor owner. This is the individual who would take control of the account in the event of the original account owner’s death or legal incapacitation. Naming a successor ensures that the account can continue to be managed for the beneficiary without interruption.

The application can be completed on the CollegeChoice 529 Direct Savings Plan website. For those who prefer a paper-based method, an enrollment form can be downloaded and mailed. A minimum initial contribution, often as low as $10, is required to officially open the account.

Funding and Using Your Indiana 529 Plan

Contributions can be made through one-time or recurring electronic bank transfers, payroll direct deposit, or by mailing a personal check. The plan also facilitates contributions from others through a feature called Ugift, which allows friends and family to contribute directly to a child’s account. These third-party contributions by Indiana taxpayers may also be eligible for the state tax credit.

Withdrawals from the plan are tax-free when used for qualified higher education expenses. These expenses are broadly defined and include:

• Tuition and mandatory fees
• Books, supplies, and required equipment
• Computers, peripheral equipment, software, and internet access
• Room and board for students enrolled at least half-time

The definition of qualified expenses extends beyond traditional college costs. Up to $10,000 per year can be withdrawn tax-free to pay for K-12 tuition. Additionally, a lifetime limit of $10,000 per individual can be used to repay qualified student loans.

Non-Qualified Withdrawals and Rollovers

If funds are withdrawn from an Indiana 529 plan for a non-qualified expense, the earnings portion of the withdrawal is subject to both federal and Indiana state income tax. The earnings are also subject to a 10% federal penalty tax. A consequence specific to Indiana is the recapture of any state tax credits previously claimed on the contributions being withdrawn, which is handled by filing Schedule IN-CR with the Indiana income tax return.

As an alternative to a non-qualified withdrawal, the account owner can change the beneficiary to another eligible family member, such as a sibling or first cousin, without tax consequences. This allows the funds to be preserved for another person’s education.

Another option is a rollover. Funds can be moved from the Indiana 529 plan to another state’s 529 plan, although this may trigger the recapture of Indiana tax credits. Under the SECURE 2.0 Act, a provision allows for tax-free rollovers from a 529 account to a Roth IRA for the beneficiary, subject to several conditions. The 529 account must have been open for at least 15 years, the rollover is subject to annual Roth IRA contribution limits, and there is a lifetime rollover maximum of $35,000.