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529 Tips

Take Your Own First 529 Steps

As you proudly watch your child learn to walk across the floor, you start thinking about how quickly she’s growing. And it hits you, college will be coming up quick, too! Start saving for her higher education expenses as soon as possible and use a 529 plan to place those funds for all the tax advantages it offers. Here are some of your own steps to take.

Best sources for 529 information

Need a place to start doing research on 529 college savings plans? Head over to an unbiased source of 529 college savings plan information – This site provides 529 plan rankings, calculators, and informative articles on college savings, scholarships, and financial aid. Additionally, Morningstar, an independent investment research company also evaluates the nation’s 529 college savings plans; here’s their most recent findings. Another resource, College Savings Plan Network, can help you to compare multiple state plans. You should always check out your state’s 529 plan, as there may be an added tax incentive to save in it.

529 plan tax advantages

For instance, with Ohio’s 529 Plan, CollegeAdvantage, Ohio residents who contribute to an Ohio 529 account can deduct up to $4,000 per beneficiary, per year, in contributions from their taxable state income. However, you can also contribute more than $4,000 in a year. Contributions over $4,000 per beneficiary, per year, may simply be carried forward to future tax years, until all of your contributions are fully deducted.

What are the other tax benefits? Established by Section 529 of the Internal Revenue Code, these college savings plans encourage parents to save their children’s future higher education costs in a tax-advantaged manner. The tax benefits are:

  • Tax-free earnings, so all investment growth is yours to cover higher education costs.
  • 529 plan withdrawals cover qualified higher education expenses  at federally accredited programs tax-free. Check the school code search at FAFSA to see if the program qualifies. These expenditures include tuition; room and board (on and off campus) when the beneficiary is enrolled at least half-time; mandatory fees; computer equipment and related technology as well as internet services; books, supplies and equipment related to enrollment and classes; certain expenses for a special-needs student, and withdrawals up to $10,000 per student, per year, for K-12 tuition at a public, private, or religious elementary or secondary schools.

What about financial aid?

Don’t worry; saving in a 529 college savings plan has a minimal effect on financial aid. For parent-owned accounts, the assets in a 529 account will be included at a maximum of 5.64% for the Expected Family Contribution (EFC) calculations for the Free Application for Federal Student Aid (FAFSA). For lower-income families, this percentage rate may be even lower. As an example, if you, as a parent, save $10,000 in your child’s 529 plan, then only $564 of those college funds will be used in the calculations for financial aid.

And what about scholarships?

A 529 account is still an important component of your college-saving strategy even if your child earns a scholarship. Very few scholarships cover 100% of the costs; for instance, a scholarship may only cover the cost of tuition. A 529 plan is perfect for filling the gaps with other qualified higher education expenses. If you are fortunate and the scholarship does cover all qualified higher education expenses, hold onto the 529 plan for your child’s continuing education such as graduate, law, or medical school. You can also transfer the 529 plan funds to another beneficiary. The new recipient must be a family member to the original beneficiary — including siblings, stepsiblings, stepparents, cousins, grandparents, nieces and nephews — to avoid tax penalties. You can also hold onto the account for your grandchildren’s future college costs since there are no time limits for using 529 plans. You can even roll over the account to yourself to fund your own continuing education!

Lastly, you have the option of withdrawing up to the same dollar amount as the scholarship from the 529 plan. This will be considered a non-qualified withdrawal and the earnings portion of the withdrawal will be subject to federal and state income taxes. Normally, there would be an additional 10% federal tax penalty on the earnings but there are three waivers for this penalty: if the student becomes disabled or dies; if the student attends a U.S. military academy; or if the student receives a scholarship. In this circumstance, since the withdrawal is for a beneficiary earning a scholarship, this federal tax penalty would not be imposed.

Honors for Ohio’s 529 Plan, CollegeAdvantage

If you looked at those unbiased 529 plan informational website, you may have discovered how well regarded Ohio’s 529 Plan, CollegeAdvantage, is within the college savings industry. In the most recent quarterly analysis of 529 plan investment performances, Ohio’s 529 Plan is listed as first in the nation in the thee-year and five-year performance category. In the one-year performance category, Ohio’s Direct 529 Plan ranks at eighth in the nation. Additionally, listed Ohio’s 529 Plan as one of its best-rated 529 college savings program across the U.S.

Morningstar gave CollegeAdvantage Direct 529 Plan a silver rating for the seventh consecutive year. Furthermore, Morningstar upgraded the CollegeAdvantage Advisor 529 Plan to a bronze ranking. This makes Ohio one of only eight states that have both their Direct and Advisor 529 Plans placed in best-in-class investment options by Morningstar. Also, a recent Kiplinger report recognizes Ohio’s 529 Plan as having best age-based portfolio for conservative investors. Kiplinger drew special attention to two of Ohio’s 529 Plan individual investment options: Vanguard Wellington and Vanguard High-Yield Corporate. Additionally, Business Insider  ranked CollegeAdvantage as the third best college savings plan in the nation. Bezinga, a website that offers financial insight, has named Ohio’s 529 Plan, CollegeAdvantage, as best for performance of the nation’s college savings plans.

Ohio’s 529 Plan tools and calculators

If you haven’t started saving in 529 account, Ohio’s 529 Plan offers calculators and tools to build a 529 plan that best fits your family’s needs. The cost of waiting tool can determine how much more money you’ll need to save to reach your college savings goals if you aren’t able to maximize the power of compound interest by saving as early as possible. With the college savings planner, you can input your own figures to receive an estimated monthly savings amount needed to reach your savings goals. Use this tool to vary the amounts of monthly contributions to see how setting aside a little more money can really add up. The tax benefit tool can illustrate how the tax benefits of a 529 plan can build the account when compared to a taxable savings account. Your asset allocation strategy is one of the most important investment decisions to make. If you aren’t sure what level of risk you’re willing to take in your investment strategy, the risk tolerance questionnaire can determine your comfort level.

An additional tool: CollegeAdvantage also provides 529 account strategies designated by life stages, what steps to consider as your child grows closer to needing the 529 funds for their higher education. Also, CollegeAdvantage Direct Plan offers a variety of investment options including ready-made, age-based or ready-made, risk-based portfolios if you like the asset allocation mix in your 529 account to auto-adjust as your child grows older by reducing equity and increasing more conservative investment vehicles.

As your child takes her first steps, take your own first steps in setting up a 529 college savings plan for her future higher education. While researching 529 plans, make sure to check out the highly regarded Ohio’s 529 Plan. When you open a CollegeAdvantage account, you’re making an investment in your child. Every dollar saved today is a dollar that doesn’t have to be borrowed which makes Ohio’s 529 college savings plan an excellent alternative to student loan debt. Ohio’s 529 Plan, CollegeAdvantage, is your plan, your way.

Posted on May 10, 2018

Ohio Tuition Trust Authority

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