Using 529s to Save for Future Higher Education

By Tim Gorrell, Executive Director of Ohio’s 529 Plan

As you watch your children climb the steps into school for the new school year, many thoughts come to your mind: Will they make new friends? Will they get along with their new teachers? What new things will they learn this year? Will they like the school lunches? Will they play sports or join other academic clubs?

Then it hits you: What will come after high school for them and how will you pay for it?

The answer to that last thought is simple: Save in a 529 college savings plan and the reasons are clear. Here’s why.

Tax Advantages of 529s

All contributions you make to a 529 account will grow tax-free. This also includes any interest that accumulates in the account. Along with the power of compound interest—the interest accrued on contributions, earnings, and earlier interest—the tax-free earnings can really grow your college savings plan. 529 withdrawals are also tax-free when used for qualified higher education expenses, those required costs to attend a school like tuition, room and board, mandatory fees, books, and computers to name a few. 49 states and the District of Columbia offer 529 plans. Over 30 states offer state income tax deductions or contributions made by residents to their home state’s 529 plan. For instance, the state of Ohio allows for a $4,000 state income tax deduction per year, per beneficiary for Ohio residents who make matching contributions to Ohio’s 529 Plan, CollegeAdvantage. However, this is not a cap on contributions for Ohioans, as Ohio offers unlimited carry-forward of the income tax deduction for any contributions over $4,000.

Not Just for Local Four-Year Programs

Higher education takes many forms. 529 plans were created to be used not just at traditional four-year colleges and universities. Withdrawals from a 529 can cover qualified costs at two-year community colleges, trade or vocational schools, as well as certificate programs. If these post-secondary programs accept federal financial aid, then 529 withdrawals can pay for qualified expenses there. To check if the school is federally accredited, do a search to see if the institutions have a Federal School Code on the Free Application for Federal Student Aid (FAFSA). While you may have saved in your home state’s 529 plan, you can use those 529 funds nationwide. 529 plans are designed to be used across the United States at any federally accredited post-secondary school.

They're Made to Work with Financial Aid

Speaking of FAFSA, when a parent owns a 529 plan it will be counted as an asset on the student’s federal financial aid application but only to a maximum of 5.64 percent of the total. Depending on your family’s financial circumstances, that percentage may be even lower. Put simply, saving in a 529 account has a minimal impact on how much federal financial aid your children could receive.

Investment Options

Like a 401(k), you will have investment options in which to choose to save your money. Most 529 plans offer age-based portfolios, which start weighted to stocks or equity while your children are young and become more conservative as your children draw closer to needing the savings for their higher education. These portfolios are also known as an enrollment-date-based funds or a target-date-based funds. Many 529 plans will also provide risk-based portfolios, individual investment options, as well as 529 savings accounts and 529 CDs. Fifth Third offers these FDIC-insured products as Ohio’s 529 Plan investment partner.

If You Aren’t Sure Where to Start

Savingforcollege.com is a trusted college-savings industry resource, which provides unbiased research on 529 plans, financial aid, and scholarships. The organization also offer tools to help families estimate college expenses, compare different state’s 529 programs, figure out for how much financial aid your student might eligible and much more. Look up information on your home state’s 529 plan and start your research on what the next savings steps to take.

If you are an Ohio resident, learn more about Ohio’s tax-free 529 Plan by visiting CollegeAdvantage and see how your savings can really add up.

When you think of your children’s future higher education, think tax-free 529 college savings plans. An investment in a 529 plan is an investment in your children as every dollar saved today is a dollar that doesn’t have to be borrowed later.

About the author:

Tim Gorrell is the executive director of Ohio Tuition Trust Authority. For almost 30 years, Ohio Tuition Trust Authority has sponsored and administered Ohio’s 529 Plan, CollegeAdvantage. Ohio’s 529 Plan oversees nearly 642,000 accounts with $12.4 billion in assets. Visit CollegeAdvantage.com or call 1-800-AFFORD-IT (233-6734) for more information.