Connecticut Tax Deductions for 529 Savings

Connecticut Tax Deductions for 529 Savings

By Tommy Martin, Financial Advisor

To encourage families to save for college, Connecticut offers tax deductions or credits to its residents. For example, Connecticut residents can deduct $5,000 to $10,000 per year per beneficiary for investments made to their CHET 529 account.

Connecticut families should consider investing in the CHET 529 plan if they are invested elsewhere for college. The tax deductions or credits offered by the state of Connecticut for contributions made to their CHET 529 plan can be considerable and help save money on taxes.

For a quick check of how much each state’s residents can deduct on their taxes, there are plenty of 529 map guides online. The map above from Invesco lets you know at a glance if there is any state tax benefit. Check it out.

Note, tax parity states allow you to deduct a certain amount on your state taxes whether you invest in that state’s plan or another state’s plan. Unfortunately, Connecticut requires its residents to invest in its state-sponsored CHET 529 plan for the tax deduction.

Transferring 529 money from one plan to another

Suppose you are a Connecticut resident and already opened a 529 plan elsewhere. In that case, you might want to consider the advantages of contributing to the CHET 529 Education Savings Plan. If it makes sense, you can “roll over” your money from one 529 plan to another – similar to a 401(k) rollover. There are some rules around this, so make sure you consult with your financial or tax advisor. We’re here to answer your questions as well.

It’s important to note that the IRS allows one tax-free rollover from 529 accounts per beneficiary in a 12-month period. Violations of this rule will treat the transaction as a non-qualified distribution, and you may be required to pay federal income tax and a 10% penalty on the earnings. If your beneficiary has multiple 529 accounts, you might not be able to roll them over during the same year. 

How much can be invested in a 529 each year?

The general rule is that you can only contribute to how much college should cost your family, which is understandably vague. The cost of college varies from school to school, ranging from thousands of dollars to hundreds of thousands of dollars.

In addition, some custodians might have their only limitations. For example, Fidelity Investments, which manages Connecticut’s CHET 529 program, maintains a $300,000 lifetime limit on each beneficiary. 

To avoid annual gift tax consequences, the maximum yearly amount invested must be less than $15,000 for a single taxpayer or $30,000 for a married filing jointly couple. These figures remained the same for 2021.

Carryforward deductions (and contributions)

A carryforward is a provision in the tax law that allows a taxpayer to apply some unused deductions, credits, or losses to a future tax year. Having a carryforward available is an excellent benefit because it enables investors to contribute more up-front without worrying about holding off on future contributions. The account owner can increase their potential return on one-time contributions through deductions and greater compounding returns. 

Let’s look at a couple of examples:

Let’s say a single parent invested $7,500 into their child’s CHET 529 account this year. They can claim a $5,000 deduction this year and claim the remaining $2,500 deduction next year. 

Let’s say an account owner contributes $40,000 into their child’s CHET 529 account this year. They can claim the $5,000 deduction this year and the next five years, but they will not be able to claim $10,000 since you can only carry the deduction for five years. 

This is commonly referred to as “front loading.”

Furthermore, families that have considerable resources can leverage tax laws to “superfund” a 529 account. Superfunding a CHET 529 account allows the account owner to make five years’ worth of contributions in one shot while still qualifying for the annual gift tax exclusion!

For example, the 2021 gift tax exclusion is $15,000 per individual. With that in mind, an individual can make a lump-sum contribution of $75,000 ($150,000 for married filing jointly filers). That’s the annual gift tax exclusion of $15,000 x 5 years. If you do that, make sure it’s reported correctly on your tax return to avoid it being counted towards your lifetime estate and gift tax exemption. 

Managing cash flow while in college

Many parents stop making contributions now that their students have arrived at college. This is a mistake and a loss of opportunity. As long as it makes sense, you should still consider contributing to your student’s CHET 529 account. 

If you’re up in the air between contributing to your CHET 529 plan or using your cash flow to pay for college, keep in mind that you only get the tax deduction for contributions made to your CHET 529 account.

Final thoughts

While the Connecticut tax deduction is a nice benefit for contributing to your CHET 529 account, the strongest reason to invest in a 529 is the tax-deferred growth and tax-free withdrawals for qualified expenses. There are many factors to consider when it comes to saving and paying for college.

We specialize in working with college-bound families to craft a well-thought-out and integrated college, retirement, tax, and investment plan. It’s all about creating an ideal college outcome.

Neither Independent Financial Group (IFG) nor any of its affiliates offer lending or repayment advice. The views expressed are those of the presenting party and may not express those of IFG or its affiliates. The information presented is for educational purposes only and is derived from sources assumed to be reliable. It is not to be relied upon as tax, legal, or financial advice, nor used for the purpose of avoiding any tax obligations. Please contact a qualified professional regarding your individual circumstances.

For Educational Purposes Only – Not to be relied upon as financial, tax, or legal advice.  The views expressed are those of the author/presenter and all data is derived from sources believed to be reliable.

The Complete Guide to CHET 529 College Savings Plans

The Complete Guide to CHET 529 College Savings Plans

By Tommy Martin, Financial Advisor

In February of 2021, the CHET 529 plan changed management from The Hartford Funds to Fidelity Investments. Due to this change in administration, many of the existing CHET 529 plan guides online are no longer accurate. 

As a financial advisor who manages Advisor CHET 529 accounts through Fidelity Investments, I can see a noticeable difference in management styles between the two. For example, Fidelity tends to be more restrictive in its administration. Without proper communication, Fidelity might code certain transactions as taxable events. 

I hope you find this guide to be current and accurate with Fidelity Investments as the manager.

Table of Contents

What is a 529 College Savings Plan?

The U.S. Securities and Exchange Commission (S.E.C.) defines a 529 plan as a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code (I.R.C. § 529). 

There are two types of 529 plans: prepaid tuition plans and education savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities sponsor a prepaid tuition plan.

Today, we will be reviewing the 529 Education Savings Plan.

The Connecticut Higher Education Trust (CHET)

The Connecticut Higher Education Trust (CHET) 529 Education Savings Plan is a direct plan offered by the Treasurer of the state of Connecticut and managed by Fidelity Investments. 

Connecticut offers two different types of 529 Plans: the education savings plan (our topic herein today) and the prepaid tuition plan. All fifty states provide at least one type of 529 plan, including Washington D.C. 

Tax Advantages of CHET

Investing in the CHET 529 may come with some tax advantages. As long as you keep your money invested in the account, no income taxes will be due on earnings. In addition to the possibility of tax-free earnings, you may also receive tax deductions up to $5,000 for individuals and up to $10,000 for married couples. 

When you take money out to pay for qualified education expenses, those withdrawals may also be federal income tax-free —and in many situations, free of state tax as well.

Are 529 Plan Contributions Tax-Deductible?

Much like the Roth I.R.A., contributions made to a 529 plan are made after-tax. Therefore, they are not deductible from federal income taxes. However, many states offer state income tax deductions or tax credits for contributions to 529 Plans. Connecticut is one of those states.

However, to receive these tax deductions or credits, Connecticut residents are restricted to investing in the CHET 529 plan, at least for the first year.

Who Can Open A CHET 529 Plan Account?

Any U.S. resident may open a CHET 529 plan account. Unlike retirement plans, there is no income restriction to open an account. The only requirement is that:

  • You must be a U.S. resident.
  • Be at least 18 years of age.
  • have a U.S. mailing address (can be a P.O. Box)
  • have a legal address (where you reside)
  • and a Social Security number or Tax ID
  • What can you pay with your CHET 529 plan?

Who Can Be A Beneficiary?

Generally, anyone can be named the beneficiary of a 529 plan. It doesn’t matter the beneficiary’s relationship to the account owner. In addition, the beneficiary can be anyone of any age, as long as they are a U.S. citizen or resident alien with a social security number or federal tax identification number. 

Also, a beneficiary can have more than one account. For example, a beneficiary’s parents may open a CHET 529 plan account for their child, and that child’s grandparents may have opened another account. Or a parent may have opened two CHET 529 plan accounts for their two children. 

CHET 529 – 2021 Contribution Limits 

According to federal law, the most a family can save in a 529 plan account is the cost of higher education. However, with the wide disparity in the price of college, this can be a confusing guideline.

Because of I.R.S. gifting rules, it’s safe to assume that the CHET 529 allows investors to save up to $15,000 per parent or $30,000 per couple

What Can You Pay With Your CHET 529 Plan?

As of 2021, qualified expenses including tuition expenses for elementary, middle, and high schools (private, public, or religious). Although the money may come from multiple 529 accounts, only $10,000 can be spent each year in total per beneficiary. In addition to college, 529 plans can pay for elementary, middle, or high school tuition. The law also allows for an aggregate lifetime limit of $10,000 in qualified student loan repayments per 529 plan beneficiary.

Here’s a list of common educational expenses and their qualification status:

Type of expenseCan you use 529 money?
Tuition and feesYes. 529 plan money can be used to pay the full amount of college tuition and required fees. Limited to $10,000 per year for K-12 private tuition.
Books and suppliesYes, for college expenses only.
Computers and internet accessYes, for college expenses only.
Room and boardYes, for college expenses only. Students need to be enrolled at least 50% of the time. 
Special needs equipmentYes, for college expenses only.
Transportation and travel costsNo. Transportation to and from campus, airfare or gas, are not qualified expenses.
Health insuranceNo. Health insurance is not a qualified college expense, even if it is offered through the school.
College application and testing feesNo, not a qualified college expense.
Extracurricular activitiesNo, not a qualified college expense.
Student loansYes, up to $10,000 lifetime limit for each beneficiary.

Advisor CHET 529 Plan Accounts

When opening your CHET 529 plan account, you have a couple of options. You can have the option of opening an account directly through Fidelity Investments and deal with them yourself, or you can open your account through a financial advisory practice like mine and have us manage everything.

One of the most significant advantages of using an Advisor CHET account is that your financial advisory team can manage your investments on your behalf. In an Advisor CHET 529 plan account, we help choose the investments, and we instruct Fidelity Investments to make trades or account changes on your behalf. And, when you need money for college, we will get a check in the mail for you. No more long calls waiting to get a representative and having to deal with people that use industry jargon. 

Should You Use Connecticut’s CHET 529 Or Another Provider?

There are compelling reasons for Connecticut residents to utilize the CHET 529 education savings plan. The most compelling of these reasons are the tax deductions or credits. 

If you choose a different 529 plan, you might not get those deductions or credits. 

CHET 529 Plan Investment Options

Investment options for your CHET 529 plan account have changed since management moved from The Hartford Funds to Fidelity Investments. Furthermore, Fidelity’s investment options can be confusing, using terminology like “investment pools.”

Pooled funds are funds in a portfolio from many individual investors that are aggregated for the purpose of investment. Mutual funds, hedge funds, exchange-traded funds (ETF), pension funds, and unit investment trust (U.I.T.), are all examples of professionally managed pooled funds. Investors in pooled funds benefit from “economies of scale,” which allow for lower trading costs per dollar invested, and diversification. 

Through CHET 529, Fidelity Investments offer a number of investment strategies: static portfolios, individual fund portfolios, age-based portfolios, and bank deposit portfolios.

Portfolio typeAllocation choices
Static portfoliosAggressive Growth Portfolio (Fidelity Funds)
Moderate Growth Portfolio (Fidelity Funds)
Conservative Portfolio (Fidelity Funds)
Aggressive Growth Portfolios (Fidelity Index)
Moderate Growth Portfolios  (Fidelity Index)
Conservative Portfolio (Fidelity Index)   
Individual Fund PortfoliosMoney Market Portfolio
Fidelity 500 Index Portfolio
Total Market Index Portfolio
International Index Portfolio
Intermediate Treasury Index Portfolio
Bank Deposit PortfolioBank Deposit Portfolio
Age-based PortfoliosAge-Based Portfolio (Fidelity Funds)
Age-Based Portfolio (Fidelity Index)
Age-Based Portfolio (Multi-Firm)   

Once you’ve set up your CHET 529 plan, you need to choose your investments. If you have an Advisor CHET through my team, we can help advise you or pick them for you based on your risk tolerance and time horizon. If you don’t know what your risk tolerance is, you can use our risk tolerance tool.

A Word of Caution About Age-Based Funds

You’ve probably seen target-date funds or age-based funds through a 401(k) style retirement plan. This is where you choose a fund based on your target retirement year. For example, if you turned 65 years old in 2040 and that’s your target year to retire, you would choose the 2040 Retirement fund. 

Age-based funds work similarly with 529 plans. The closer your beneficiary gets to college, the more defensive the fund gets. The closer you get to college, the more it will buy into bonds and hold onto cash. 

I think the point here is to understand what you are investing in and how those investments work. I would be disappointed to find out that I missed out on a good year because my funds sold out of stock and moved into bonds and cash.

College Savings or Retirement Savings?

I think every parent battles with the question, “Which is more important: College Savings or Retirement Savings? In the financial services industry, we always say, “There are student loans for college. There aren’t any loans for retirement.” And, in the air travel industry, they say, “Put your mask on first. Then, help your children with theirs.”

There’s something to that. Our children are not our retirement plan. As much as they love us today, our children will not be keen on us using their homes for retirement. I understand that some of us do and wouldn’t mind. But, by large, it’s an inconvenience that not many of us want to sign up for. 

This is my view. You are welcome to have a different one.

Get Your College Budget Report

The cost of college widely depends on your family’s financial resources, family size, academics, the school you want to attend, and much more. Unfortunately, most families do not have the financial fluency it takes to calculate how much all four years of college will cost, let alone how to pay for it all.

Our College Budget Report will give you the key answers you need. Do you qualify for need-based financial aid? What about merit-based scholarships and grants? Let us show you what colleges and universities are looking for in your tax returns.

Neither Independent Financial Group (IFG) nor any of its affiliates offer lending or repayment advice. The views expressed are those of the presenting party and may not express those of IFG or its affiliates. The information presented is for educational purposes only and is derived from sources assumed to be reliable. It is not to be relied upon as tax, legal, or financial advice, nor used for the purpose of avoiding any tax obligations. Please contact a qualified professional regarding your individual circumstances.

For Educational Purposes Only – Not to be relied upon as financial, tax, or legal advice.  The views expressed are those of the author/presenter and all data is derived from sources believed to be reliable.