If you want to save for your children education after high school but aren’t sure where to start, your first step should be researching your best options. Make sure your investigations include tax-free 529 college savings plans.
Step 1: Research 529 plans
Established by the federal government in 1996, 529 plans are the tax-advantaged way to save for whatever education comes after high school for your child. 529 plans can be used at a federally accredited higher education institution — from two-year, four-year, graduate, trade or vocational schools to certificate programs. If the school has a Federal School Code on the Free Application for Federal Student Aid (FAFSA), then the withdrawals to cover qualified higher education expenses at that school will be tax-free.
Another advantage is that no matter what state or program’s 529 plan you save in, your 529 account will be accepted at schools nationwide. For example, if you save with Ohio’s 529 Plan, CollegeAdvantage, your child can use the Ohio 529 for any type of degree, at any accredited college, university, or other program in the country.
Step 2: Check out 529 plan’s tax benefits
There are many reasons to save in a tax-free 529 plan, especially when compared to the typical, taxable bank savings account. Your higher education savings grow in a tax-advantaged manner in a 529 plan.
All earnings grow tax-free so all earned income is yours to use to cover qualified college costs without negative tax consequences. This also includes all the compound interest, which is accrued on all contributions, investment options earnings, and the already accumulated interest. The longer a college savings plan has time to grow, the longer compound interest can add to the account. This is an excellent reason to start as 529 fund as early as possible for your child.
In addition, 529 plan withdrawals are tax-free when used qualified higher education expenses, which are those required costs for attendance at a school. These expenses include tuition; room and board during any academic period in which the 529 beneficiary is enrolled for at least half of the full-time academic workload according to the eligible education institution; mandatory fees; computer equipment and related technology as well as internet services; books, supplies and equipment related to enrollment and class schedule; and certain expenses for a special-needs student.
With the SECURE ACT component of the Further Consolidated Appropriations Act, two new qualified costs were added to 529 plans: certain apprenticeships costs and payment for any student loan that qualifies for the federal student loan income tax deduction. There is a $10,000 lifetime limit per 529 beneficiary. An additional $10,000 can be used to repay qualified student loans for each of the beneficiary’s siblings. A 529 withdrawal can also be used to pay for K-12 tuition at a private, public, or religious elementary or secondary school. There is a limit of $10,000 per year that can be withdrawn from a 529 account to pay for the K-12 tuition. If your child has more than one 529 plan, then the combined qualified distributions from all the 529 accounts for K-12 tuition is limited to $10,000 a year. Consult your qualified tax advisor for specific information.
With the SECURE ACT 2.0, another use for an Ohio 529 account was added that will give your child a start on their retirement savings. Beginning Jan. 1, 2024, families with leftover funds in their 529 accounts can rollover it over to a Roth IRA for the same 529 beneficiary without incurring any penalty on the earnings. There are some requirements in order to use this new qualified distribution. First, a 529 account must be open for the beneficiary for 15 years. Second, the Roth IRA must be for the same beneficiary of the 529. Third, your contributions—which are also known as the principal—must have been in your Ohio 529 account for at least five years before the Roth IRA rollover. Fourth, you can only roll over 529 funds up to the yearly Roth IRA contribution limit, which is $6,500 for 2023. Fifth, the lifetime maximum 529 amount allowed for the Roth IRA rollover is $35,000.
For Ohio residents with an Ohio 529 account there’s an additional tax advantage. Ohioans can deduct their 529 contributions from their Ohio taxable income, up to $4,000 per year, per beneficiary, with unlimited carry forward, which means that $4,000 per year is not a contribution cap. With unlimited carry forward, an Ohio taxpayer can continue to subtract $4,000 per year, per beneficiary, from their Ohio taxable income until all the 529 contributions have been deducted.
Step 3: Use tools to shape the 529 that’s right for your family
Ohio’s 529 Plan offers tools and calculators to help you shape the college saving account that best fits the needs of your family. Our College Savings Estimator can help you determine what dollar amount you would like to set aside to reach your college savings goal. The Cost of Delaying Saving Tool can show how starting early with your higher education savings can really build up, even if it’s small contributions to start. The Tax Benefit Tool illustrates how the tax-free earnings in a 529 plan allows you to keep every dollar that grows in the account, unlike a taxable bank savings account.
Step 4: Review the investment options
Ohio’s 529 Plan offers target enrollment portfolios — Advantaged Age-Based Portfolios (AABP) and the Ohio Vanguard Target Enrollment Portfolios — that reflect college-savings industry standards of smoother glide paths. A glide path determines the asset allocation mix within an investment option.
For an target enrollment 529 portfolio, the asset allocation mix is created through age bands. When the beneficiary is young, there is more stocks (equity) in the portfolio. Why? Stocks are affected by market volatility; so if there is an economic downturn, there will be more time for the college savings plan to recover. As the beneficiary grows older, the mix adjusts with each new age band, reducing the amount of equity and increasing the amount of more conservative investments such as fixed-income and cash preservation options.
You can also create your own investment portfolio with international equity options, U.S. equity options, balanced options, fixed-income options, capital preservation option, and banking options.
Step 5: See how automatic contributions builds up your savings
One of the simplest ways to save is to set up automatic deposits to a 529 college savings account and then forget about it. Many account owners say it’s easiest to have contributions automatically transferred from their checking or savings bank accounts to the 529 account before the funds are unintentionally spent on other expenses. Electronically transferred 529 contributions can be scheduled to match your paycheck deposits or to another monthly contribution schedule. Some employers also offer payroll deduction, where a portion of your paycheck is directly deposited into your 529 account. You can login to your 529 account and establish payroll deduction through direct deposit. You can also complete then mail in a payroll deduction form. One of CollegeAdvantage’s investment option, a Fifth Third Certificate of Deposit (CD), is not available for purchase through automatic recurring contributions or payroll deduction. It must be opened with a minimum $500 contribution.
Small investments can add up to big savings over time through regular automatic contributions or payroll deductions.
Step 6: Open an Ohio 529 Plan account
After doing your research, you’ll find it’s easy to open an Ohio 529 Plan online to save for your child’s future training and education.
You will want to collect some personal information necessary to open the 529 account. ONe thing to consider is adding a successor owner, the person you designate to become the 529 account owner in case you become unable to continue in that role. It’s important to have a successor owner to allow for an easy transfer of account ownership and the continuance of the saving strategy you established for your child should something happen to you as account owner.
There is no fee to open an Ohio 529 Plan. The minimum contribution to open your account is $25.
For more than 30 years, Ohio’s 529 Plan, CollegeAdvantage, has helped families across the nation save money for their children’s future higher education costs with tax-advantaged benefits. If you’d like to do more research, explore Ohio’s 529 Plan —The Plan That Can — at CollegeAdvantage.