Not only is September back-to-school season, it’s also College Saving Month! Whether you’re watching your child board the school bus, or walking or driving them to school, you should know that’s it’s never too late, and never too early to save for their education after high school. A 529 plan is a great way to save for a higher education with many benefits doing so.
Many families across the country are already saving in 529 accounts. According to the College Savings Plans Network (CSPN) as of March 31, 2023, more than $432 billion are being saved in 529 accounts in more than 16.1 million 529 accounts nationwide to help families achieve their education goals. As of June 30, 2023, Ohio’s 529 Plan, CollegeAdvantage, has $15.71 billion saved in over 673,143 accounts.
To help families kick off their own 529 savings journey or to add to an already established 529 account to celebrate College Savings Month, College Savings Plans Network (CSPN) is giving away nine (9) $529 college savings awards! Visit www.collegesavings.org/sweepstakes to enter “What Can A 529 Do For You?” College Savings Month Sweepstakes. Complete the online form and add a testimonial on how a 529 can benefit your family’s education dreams. This sweepstakes will start at 12 a.m. Friday, Sept. 1, 2023, and will run through 11:59 p.m. Sunday, Oct. 1, 2023. You can enter this sweepstakes only once.
Why are families choosing to save with Ohio’s 529 Plan? We help forward-thinking parents make their children’s higher education doable. Ohio’s 529 Plan shares informational resources and tools with parents as they develop their school-after-high-school savings strategy. There are many reasons why parents are placing their children’s higher education savings in Ohio’s 529 Plan, and here are ten of them.
1) Save in Ohio 529 and use it nationwide
Just because you are saving in Ohio’s 529 Plan doesn’t mean your child can only attend Ohio schools. You can use your Ohio 529 account nationwide at almost any school you are comfortable sending your child and your money. 529 plans can be used at any post-secondary school that accepts federal financial aid. If you want to confirm a higher education institution accepts federal aid, then do a Federal School Code search. If it has one, then you can use your 529 funds there.
2) Not just for four-year schools
Ohio’s 529 Plan can be used for whatever comes after high school, including trade and specialty schools, community colleges or technical schools, certificate programs, four-year universities and colleges, all types of graduate school, including law school and medical school. Additionally, 529 funds can pay for qualified costs for apprenticeships that are registered with the Secretary of Labor’s National Apprenticeships Act.
As an adult, you can also use a 529 college savings plan for your own continuing education. Whether it’s to complete your degree, earn additional credentials to grow your career, or take a new career path, a 529 plan can help you earn the education for which you’re striving.
529s can also be used tax-free to pay qualified student loans and start a Roth IRA for the same beneficiary as the 529 account. To read more about these two other qualified 529 distributions, please read below.
3) Just $25 to start
You can start saving for your child’s future with as little as $25. You only need $25 to make an opening contribution to start an Ohio 529 account. And additional contributions start at $25. As Ohio’s 529 Plan doesn’t believe in charging you to do the right thing for your children, there are no fees to open an Ohio 529 account. We know there’s a lot of expenses in your budget but saving for your child’s higher education shouldn’t be a large draw on the family finances. After all, $25 saved now is $25 (plus compound interest) doesn’t have to be borrowed later.
4) We’ve got an app!
Ohio’s 529 Plan offers the READYSAVE 529 app, so you can manage your higher education savings from your phone! The app makes it easy for you to access your account information, track account growth, and make one-time or recurring contributions from your bank account from your cell phone. You can also send an Ugift invitation to your family and friends to contribute to your child’s higher education with the READYSAVE529 app.
The READYSAVE 529 app is available at the Apple and Google Play app stores. Once installed, select Ohio’s 529 Plan from the list and log in with the same username and password you use to access your account online.
5) Tax benefits
There’s three main tax benefits available to every Ohioan who saves in Ohio’s 529 Plan.
First, while saving in Ohio’s 529 Plan, any earnings will be tax-free. This means that all the investment growth is yours to use for your children’s future college costs. Compound interest — the interest earned on contributions, earnings, and interest already accumulated in the 529 account — is included in the tax-free earnings. To see just how tax-free growth adds up with a 529 savings plan, use the tax benefit tool to see the difference between a 529 plan account and a taxable savings account.
Second, withdrawals to cover qualified higher education expenses are tax-free at federally accredited programs. As with all 529 college savings plans, the burden of proof for qualified expenses and withdrawals is on the account owner for tax purposes. Retain all documentation of your payments for tuition, room and board, and other 529-qualifed expenses.
Third, an Ohio resident who saves in Ohio’s 529 Plan can deduct their contributions from their taxable state income. The deduction amount is $4,000 per year, per beneficiary, with unlimited carry forward. This means that $4,000 is not a contribution cap. If an Ohio taxpayer contributes more than $4,000 in one year, they can continue to subtract $4,000 per year, per beneficiary, from their State of Ohio taxable income until all Ohio 529 contributions have been deducted.
6) Flexible uses for 529 withdrawals
Again, all 529 withdrawals are tax-free for qualified expenses, those required costs to attend a post-secondary education institution.
These expenditures include tuition; room and board 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; and certain expenses for a special-needs student. Room and board costs can also include rent for off-campus residency and groceries (non-taxable items only), provided these costs are equal or less than the same room and board allowances from the accredited school. As is the case with all 529 college savings plans, the burden of proof for tax purposes for qualified expenses and withdrawals is on the account owner. Retain all documentation of your beneficiary's room and board and other 529-qualifed expenses.
Tax-free 529 withdrawals can also pay for certain expenses associated with apprenticeship programs that are registered and certified by the Secretary of Labor under the National Apprenticeship Act.
And 529 withdrawals can also pay for the principal and interest on qualified education loans for the beneficiary of an account or the beneficiary’s siblings. The loan repayment provision applies to repayments up to $10,000 per beneficiary. The $10,000 is a lifetime amount, not an annual limit. Consult your qualified tax advisor for specific information.
Did you know that you can use your 529 plan to pay K-12 tuition up to $10,000 per student, per year, for enrollment at public, private, or religious elementary or secondary school? If there are multiple accounts for a student, the combined 529 distributions to pay for their K-12 tuition is limited to $10,000 per year. Consult your qualified tax advisor for specific information.
And starting in January 2024, you can jump start your children’s savings funding by rolling over any remaining 529 funds to a Roth IRA. You can read more about this newest 529 feature below.
7) Save with loved ones’ contributions
When family and friends ask for gift ideas, tell them that they can help with a big milestone in your child’s life – their higher education —with a contribution to your child’s 529 plan. With Ugift, it’s simple for anyone to contribute to your CollegeAdvantage Direct Plan account. Log in to your 529 and click on Ugift to receive a unique code for your account. This code allows others to make online contributions from their bank account to your 529 plan without the actual account number at Ugift529.com. The gift giver can make one-time or recurring electronic contributions at any time. If they are Ohio residents, they can deduct their Ohio 529 contributions up to $4,000 from their state taxable income.
8) Minimum effect on financial aid
The revised Free Application For Federal Student Aid (FAFSA) is expected to be released in December 2023. Once available, families can start to fill out the form as FAFSA is the application for federal financial aid used to attend four-year colleges and universities, community colleges, trade and vocational schools, and graduate schools. Most higher education institutes also will use the FAFSA information to determine the amount of financial aid the school will provide to students.
Being proactive by saving for your child’s education in a 529 plan will not dramatically affect your financial aid when you fill in FAFSA. Current federal guidelines state that if a student is a dependent and the 529 account is owned by a parent, then the account will be considered the parent’s asset and will be calculated at a maximum of 5.64% of its value. So let’s say, you’ve saved $10,000 in your 529 account. Only $564 of it would be included as an asset on FAFSA. And wouldn’t you rather have $10,000 for college than potentially lose less than $564 of financial aid?
Starting on the FAFSA for the 2024-25 school year, any 529 funds released from a grandparent-owned 529 funds will not considered as an asset to beneficiary and therefore won’t be included on the calculations for financial aid.
9) What if your child doesn’t want to go to college?
You have options if your child doesn’t want to start their higher education right after high school. First, there is no deadline on when to use a 529 account. So you can wait to see if your child changes their mind. The funds will be ready to use if they decide to pursue their higher education at a four-year program, community college, trade or technical school, apprenticeship or certificate program later.
If your child absolutely decides against pursuing a higher education, you can transfer the 529 account to another member of the family – whether related by blood, marriage, or adoption — without any fees.
If your child is starting their career at U.S. military academy, then you can make a non-qualified withdrawal from the 529 account up to the estimated cost of attending the military academy without incurring a 10% federal tax penalty. The earning portion only of the withdrawal will be subject to federal, state, and local taxes.
If you reach a point where your 529 account is simply not going to be used, you can request a non-qualified withdrawal from it. The earnings-only portion of the withdrawal will be taxed on the federal, state, and local level. Like other tax-advantaged saving programs, there will be a 10% federal tax penalty assessed for withdrawing money from the 529 plan for costs that aren’t qualified higher education expenses. Before you elect to make a non-qualified withdrawal, first talk with your financial advisor or tax consultant to evaluate your options.
10) Use A 529 To Fund A Roth IRA
Starting in January 2024, you will also be able to roll over the unused Ohio 529 funds into a Roth IRA for the same beneficiary of the original college saving account. So if your child doesn’t use all the funds in the account, you can use those 529 funds to kick off their retirement savings. Your 529 account must meet 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—also called 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.
There are still many clarifications and operational issues that will need to be resolved relating to this recent change. We will provide more information once available. Again, keep in mind change does not go into effect until Jan. 1, 2024.
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. Learn, plan and start with Ohio’s 529 Plan today at CollegeAdvantage.
This article was originally posted in August 2020 and has been updated to reflect new information for 2023.