See the difference these tax advantages can make over time in the table below.
This example assumes an initial investment of $5,000, monthly contributions of $100, and a 6% annual rate of return over 18 years. The taxable account assumes a 28% federal and 5% state tax rate. The illustration is for illustrative purposes only and does not represent the performance of any specific portfolio.
Qualifying Expenses & Institutions
Qualified Higher Education Expenses may include tuition, certain room and board expenses in addition to any fees, books, supplies and equipment required for enrollment and attendance at an Eligible Education Institution. Computers and related technology such as internet access fees, software or printers are also qualified education expenses. The student must be the primary user of the equipment.
If the beneficiary is a special needs student, any additional costs required for enrollment or attendance to meet those needs will also be covered.
In addition, up to $10,000 annually can be used towards K-12 tuition per student from all 529 plans.
Federal Legislation includes changes to 529 College Savings Plans.
See the Disclosure Booklet (PDF) for more information.
Visit Ed.gov to find out if your school is accredited.
Federal Income Tax Benefits
As a 529 Plan, ScholarShare offers important income tax benefits. Although contributions are not deductible on your federal tax return, any investment earnings can grow tax-deferred, and distributions to pay for the beneficiary’s college costs come out federally tax-free.
State Income Tax Information
In addition to federal tax benefits, there are state tax benefits as well. For ScholarShare, tax treatment is as follows:
While contributions are not deductible for California income tax purposes, earnings accrue free of state income tax. Qualified Withdrawals and any outgoing rollovers free from federal income tax are also free from California income tax. California tax benefits related to ScholarShare are available only to California tax payers. You should talk to a qualified advisor about how California tax provisions affect your circumstances.
Directing Contributions from Your California State Tax Refund
Are you getting a tax refund this year? Now you can deliver potential lifelong returns to an aspiring college grad in your life! ScholarShare coordinates with the California Franchise Tax Board to make it easy to deposit your tax refund directly from FTB into your ScholarShare account.
What You’ll Need
In order to make a direct deposit from the Franchise Tax Board to ScholarShare, you’ll need to have an account established, and have the following information:
ScholarShare routing number
Your ScholarShare account number
Your investment portfolio number
How to Do It
- 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)
- Select “Checking” as type of account
- Provide your ScholarShare number in this exact format: (1) “CA” as prefix, (2) your 4-digit investment portfolio number1, and (3) your ScholarShare account number (for account numbers less than 11-digits, you must add leading zeroes)
- See a sample here:
1 Investment Portfolio Number and Account Number may be found on your statement or online when logged in to your account.
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. Consult your tax advisor.