Saving for college is hard. But a few states and more employers are making it a little easier by offering incentives to contribute to 529 college savings plans.
In July, Nevada passed a law that gives employers a 25 percent tax credit on matched contributions to 529 college savings plans up to $500 per employee. The tax credit goes into effect on Jan. 1.
"This is another tool in the toolbox for longer-term financial planning. We have seen how the 401(k) industry has dramatically improved the nation's retirement landscape. We anticipate the tax credit will allow employers to greatly enhance higher education saving goals," Nevada Treasurer Dan Schwartz said in a statement.
Nevada is the second state to promote matching contributors for 529 plans. Illinois has allowed employers to claim a 25 percent tax credit of up to $500 per employee contributing to a 529 plan since 2009.
"We are hoping [the Nevada law] is the start of a trend," said Peg Creonte, senior vice president at Ascensus College Savings, which provides administrative services for 31 such plans across 17 states. Ascensus has seen double-digit growth year over year since 2012 in 529 plan contributions from workers who set up payroll direct deposit with their employers. The company estimates it will receive $152 million in 529 plan contributions through payroll deductions this year, up 10 percent from 2014.
Yet employers are taking baby steps when it comes to offering 529 plans at the workplace. Only 7.6 percent of employers allowed workers to contribute to a 529 plan through payroll deduction in 2014, up from 6.8 percent in 2012, according to a survey by employer benefits retirement trade magazine Plansponsor. Larger employers were twice as likely to allow workers to contribute to 529 plans through payroll deduction than smaller employers.
Offering 529 plans at the workplace is a "a great way to jumpstart college savings," said Andrea Feirstein, managing director of AKF Consulting Group and a former director of college savings at Citigroup.
The 529 plans need all the support they can get. Two-thirds of Americans don't know what a 529 plan is, according to a recent survey by the Edward Jones investment firm, and Sallie Mae found only 27 percent of families saving for college use 529s, down from 29 percent in 2014.
States sponsor 529 college savings plans, which let contributions grow tax free like an IRA. Each plan has different contribution limits and investment options. There are no federal tax breaks for 529 plan contributions, but many states offer residents deductions or credits. When withdrawn, earnings from a 529 plan are free from federal income tax if they are used to pay for qualified higher education expenses, which include tuition, fees, books, room and board.
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But 529 plans aren't a magic bullet to stop rising college costs. The average 529 investor only has enough saved to cover a fraction of the average cost of college tuition. Financial research firm Strategic Insight estimates that 11.2 million 529 plan investors held an average balance of $20,617 as of March 31, the latest data available, up slightly from an average balance of $20,474 on Dec. 31. That's less than the estimated cost of a year at a public four-year college for out-of-state residents, according to the College Board.
Employers offering a 529 plan match also face some tax complications. They or their employees will have to pay federal taxes on the match as if it were income. That means an employee in the 25 percent federal tax bracket would owe $125 in taxes on a $500 employer match, unless an employer picked up the tab.
It's early days for workplace 529 plans and many of the challenges still have to be worked out, Feirstein said. "We have federal tax benefits for retirement savings, we are catching up on the state level to have similar tax benefits for college savings," she said.