Recently, there has been a renewed call to increase our country’s financial education. To support this growing emphasis on knowing monetary basics, April has been designated as Financial Literacy Month for 2023.
A 529 savings plan is one financial tool where increased awareness is needed. According to the 2022 How America Pays For College Report by Sallie Mae, only 33 percent of families saving for college are using a 529 plan.
Ohio’s 529 Plan, CollegeAdvantage, would like to highlight all the benefits of saving for a higher education in a 529 plan as well as answer some of most frequently asked questions.
What is a 529 plan?
Created with Section 529 of the Internal Revenue Code in 1996, the federal government established 529 plans to encourage families to save their children’s future higher education costs in a tax-advantaged manner. CollegeAdvantage is Ohio’s 529 college savings program. There are several tax benefits to opening a CollegeAdvantage Direct 529 Plan account.
What are the tax advantages of saving in Ohio’s 529 Plan?
First, earnings in a 529 plan grow tax-free, so all investment growth will be yours to spend on higher education costs. To see how tax-free growth can build your 529 account, use the Tax Benefit Tool to see how the funds in a 529 grow compared to a taxable savings account.
Second, 529 plan withdrawals to pay for qualified higher education expenses are tax-free at accredited schools and programs that accept federal financial aid. These qualified costs are the mandatory expenses to attend the school or program such as 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.
Certain apprenticeships costs — fees, textbooks, supplies, and equipment, including required trade tools — can now be paid with a 529 plan withdrawal. The apprenticeship program must be registered with the Secretary of Labor’s National Apprenticeships Act in order to use a 529 plan withdrawal. Interested parties can check the Labor Department’s search tool to confirm that a program is eligible.
Additionally, any student loan that qualifies for the federal student loan income tax deduction can now be paid with a 529 distribution. There is a $10,000 lifetime limit per 529 beneficiary. The withdrawal request must be made within the same calendar year in which the expense was incurred. However, an additional $10,000 can be used to repay qualified student loans for each of the beneficiary’s siblings.
Finally, Ohio offers a deduction from taxable state income to Ohio residents who contribute to Ohio’s 529 Plan, up to $4,000 per year, per beneficiary, with unlimited carry forward. Unlimited carry forward means $4,000 is not an annual contribution limit. As an Ohioan, if you contribute more than $4,000 in one year, you can continue to subtract $4,000 per year, per beneficiary, from your State of Ohio taxable income until all the 529 contributions are deducted.
What if my child doesn’t go to an Ohio school?
A 529 account can be used at any federally accredited institution nationwide. That means that while you are saving with Ohio’s 529 Plan, your child can choose to use those funds at an eligible post-secondary education institution across the U.S. If the school has a Federal School Code on the Free Application for Federal Student Aid (FAFSA), then withdrawals for the qualified higher education expenses at that school will be tax free.
What if my child doesn’t want to go to a four-year school?
529 plans can be used for whatever school comes after high school – whether for a two-year, four-year, graduate or professional degree, certificate programs, registered apprenticeships programs, or any other post-secondary credential. This list includes community colleges and technical schools, vocational or trade schools, graduate schools, and even some study-abroad programs.
What if we’re expecting financial aid?
When filling in the Free Application for Federal Student Aid (FAFSA) form, your 529 account is considered an asset. When owned by a parent, the 529 plan funds are assessed at a maximum of 5.64% of its value. Therefore, if you, as a parent, have saved $10,000 in Ohio’s 529 Plan account, only $564 would counted against your child’s potential eligibility for need-based Federal financial aid.
Federal financial aid is typically offered in the form of grants, loans or work-study. With Pell Grants, students do not repay this aid. Work-study programs allow enrolled students to work part-time to earn money for some college costs. Federally subsidized student loans and parental loans must be repaid after college with interest. Make sure you understand what type of aid is being offered to see whether or not you will have to repay it with accrued interest.
Another reason to fill out FAFSA: Organizations—like states, universities, colleges, and private organizations—also use it to determine what institutional scholarships or loans to offer to students interested in attending their school.
What if my child gets a scholarship?
Your Ohio 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. A 529 plan is perfect to pay for the other qualified expenses not covered by the scholarships, such as room and board.
If your child does receive a full-ride scholarship, you can withdrawal the matching amount of the scholarship from your 529 plan. As this is a non-qualified withdrawal, you will have to pay taxes on the earnings portion.
What if my child doesn’t go to college?
You always have access to the money you have saved in a 529 plan. Hold onto to the account to see if your child rethinks the decision for there are no time limits using a 529 account. Let the 529 plan sit and watch the tax-free earnings continue to grow. If your child definitively decides that they don’t want a higher education, you can transfer the funds to any member of the family* of your beneficiary, including yourself, without any tax consequences. A member of the family is anyone related to the original beneficiary by blood, marriage, or adoption.
You also have the option of withdrawing all the funds from your 529 plan. There will be a 10 percent federal tax penalty as well as taxes assessed at the State and Federal level on the earnings portion only of the withdrawal.
What’s an easy way to fund my 529 account?
April is also the time of the year when families work on their taxes. And for 2023, the tax filing deadline is April 17. Did you know that saving your tax refunds in Ohio's tax-free 529 Plan could be your higher education savings plan? The average 2021 federal tax refund for Ohioans was $2,059. Check out this saving scenarios by adding your tax refund number to our College Savings Estimator. Please note that this is an example for illustrative purposes only. For additional advice, consult with your legal, financial, tax, or other advisor.
If you'd like to see other simple savings solutions, Ohio's 529 Plan has additional ideas to share.
Is there a quick way to check my Ohio 529 account?
You can manage your college savings from your cell phone! For quick and simple to access your college savings account, Ohio's 529 Plan now offers the READYSAVE 529 app. Our new savings app, developed in conjunction with our recordkeeping partner, Ascensus, makes it easy for you to access your account information, track account growth, and make both one-time and recurring contributions from the bank account on file from your cell phone! And with the READYSAVE529 app, you can send an invitation to your family and friends to contribute to your child’s higher education via Ugift.
You can download the READYSAVE 529 app now from the Apple and Google Play app stores. The app requires iOS 14 or higher for Apple devices and Android 7.0 or later for Google devices. Once you install the app, select Ohio’s 529 Plan from the list and log in with the same username and password you use to access your account online.
Visit Ohio’s 529 Plan online to start saving today for your child’s future education. An investment in a 529 plan is an investment in your child where every dollar saved today is a dollar that doesn’t have to be borrowed later. A 529 account can be used for whatever school comes after high school. Learn, plan, and start with Ohio’s 529 Plan today at CollegeAdvantage.
This article was originally posted in April 2020 and has been updated to reflect new information for 2023.
* Internal Revenue Code Section 529 defines a family member as: a son, daughter, stepson or stepdaughter, or a descendant of any such person; a brother, sister, stepbrother, or stepsister; the father or mother, or an ancestor of either; a stepfather or stepmother; a son or daughter of a brother or sister; a brother or sister of the father or mother; a son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law; the spouse of the Beneficiary or the spouse of any individual described above; or a first cousin of the Beneficiary. Gift or generation-skipping transfer taxes may apply. Please consult with your tax advisor for further information.
This article was originally posted in March 2020 and has been updated to reflect new information for 2023.