California dad Chad Buechler anticipates he will get $2,500 this year from his employer, Dun & Bradstreet Credibility, for his children's education.
The money is divided evenly at his request between their two 529 plans, as these tax-advantaged college investment accounts are commonly called.
It's part of a company program that matches employee contributions to 529 plans up to $1,500 annually for hourly employees and $2,500 annually for salaried employees.
[Map out a college savings timeline this year.]
In 17 years, even before any interest or earnings are factored in, company contributions could total up to $42,500 for salaried employees or $25,500 for hourly employees.
College savings matching programs work similarly to 401(k) programs. The matching dollars are deposited directly into the plan. With the employee's contributions, a salaried employee would accumulate $85,000 and an hourly employee would accumulate $51,000 before interest or earnings are added if they contributed the maximum for matching. The money may total even more if matching limits rise in the future – though employees may contribute more than the company will match.
More and more employers are offering matching or other contribution programs for 529 plans. However, parents still need to understand the tax implications, restrictions and exactly how much is matched.
[Explore other ways to use workplace benefits to fund 529 plans.]
Unlike 401(k)s, the money deposited is taxable. Dun & Bradsheet Credibility offers employees money to pay taxes on the matched funds, says Jeff Stibel, CEO of Dun & Bradstreet Credibility. But if an employer doesn't pay the taxes, parents have to be prepared to foot the bill.
For example, an employer gives $500 to an employee that's deposited directly into a 529 plan. As with contributions employees make themselves, they have to pay federal and state taxes on this amount as if it were income. So if an employee is in a 25 percent federal tax bracket, he or she would automatically owe $125 on the $500 contribution that they'd have to pay in the same year that the money is deposited.
If the employer deposited $2,500 in matching funds to an employee in the same 25 percent tax bracket, the employee would have to pay $625 in federal income tax alone on the matching contribution.The parent could also owe state income taxes. For instance, if a state has a 5 percent income tax, the parent would owe another $125. Thus, parents need to find out how taxes they'll owe to make sure they can afford to make the contribution.
The next consideration is if there any restrictions on the matching funds. For instance, will the employer deposit the funds into one 529 plan account or is it possible to divide the monies among multiple children?
Stibel is working on fully funding the account for his oldest child first, while Buechler chooses to split the match evenly.
Generally, the beneficiary of a 529 plan can be changed, so money left over from an older sibling's account can be used for a younger sibling later on.
[Find out when and where to get college savings advice.]
Other programs simply offer contributions without an employee contribution needed. Utah company Futura Industries contributes $5 per A on a child's report card to an employee's 529 plan or $2.50 per A-minus, says Patricia Chapin, a human resources specialist with the company.
If a child received straight A's for six courses per semester for two semesters, they'd receive $60 annually in contributions. Over 10 years, this could add up to $600 in contributions. Parents would likely still have to pay taxes on those contributions as well.
Stibel has found adding the 529 plan was an emotional experience for his employees who are concerned with how to pay their kids' college education. When the program launched just last month, employees were in tears, he says.
"Having additional funds for my boys to get started on life is a great benefit," Buechler says.
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