Indiana taxpayers contributing to CollegeChoice 529 plans must be aware of changes for the 2023 and 2024 tax years.
Increased Indiana State Tax Credit
New in 2023, there is an increased state tax credit for Indiana residents contributing to CollegeChoice 529 plans. Before, the 20% state tax credit capped out at $1,000 for a $5,000 contribution. Now, Hoosiers can receive the 20% credit on up to $7,500 in annual contributions for a maximum credit of $1,500. This state tax credit is non-refundable.
As a reminder, any Indiana resident contributing to a CollegeChoice 529 plan is eligible for the state tax credit. Being an account owner of a CollegeChoice 529 plan is not a requirement to receive the credit. For example, Kelsey owns a CollegeChoice 529 plan, and her son Jude is the beneficiary. Kelsey’s mom, Barbara, can contribute to the CollegeChoice 529 plan Kelsey established for Jude, and Barbara can receive a state tax credit if Barbara is an Indiana resident.
New Indiana 529 Plan Contribution Deadline
There is a new contribution deadline beginning in tax year 2023. Previously, any contributions made to the CollegeChoice 529 plan had to be made by December 31st to qualify as a contribution for the current tax year. Now, contributions for the current tax year can be made by the tax filing deadline in April of the next tax year.
For example, if Kelsey wanted to contribute to Jude’s CollegeChoice 529 plan for tax year 2023 and receive the state tax credit, Kelsey has until April 18, 2024, to contribute for 2023.
529 Plan to Roth IRA Rollover
New in 2024, funds within 529 accounts can be rolled over to a Roth IRA (federal tax and penalty-free). It’s important to note the Indiana Department of Revenue recognizes 529 account rollovers to Roth IRAs as non-qualified education expenses which are subject to state taxes, and state tax credit recapture. There are many rules surrounding this new law, summarized below:
- The 529 account beneficiary and the Roth IRA owner must be the same person to be eligible for the rollover.
- The 529 account must exist for 15 years to be eligible for the rollover.
- According to the Indiana Department of Revenue, if a 529 account beneficiary is changed to a different individual, this beneficiary change does not reset the 15 years necessary to be eligible for the rollover (there has not been clarity issued on a federal level surrounding this rule).
- The lifetime maximum amount that can be rolled over from a 529 account to a Roth IRA is $35,000 per beneficiary.
- The eligible rollover amount must have been in the 529 account for at least five years.
- The total annual amount that can be rolled over from a 529 account to a Roth IRA cannot exceed the annual IRA contribution limits (for tax year 2024, the maximum amount is $7,000), less any other IRA contributions.
- It’s best practice to rollover funds from a 529 account to a Roth IRA in years the beneficiary has earned income (the amount eligible to be rolled over is the lesser of earned income or the annual IRA contribution limit).
Given the rules associated with the 529 account to Roth IRA rollover, it’s important to discuss the advantages and disadvantages of a rollover with your Bedel Financial team.
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