By Tim Gorrell, Executive Director, Ohio Tuition Trust Authority
May 14, 2019
There’s much to consider when you’re thinking of saving for a child’s future higher education costs. Based on some of the most frequently asked questions about 529 plans, here’s what you need to know.
What’s a 529 plan?
A 529 plan is a tax-advantaged way to save for future higher education expenses. Created by Section 529 of Internal Revenue Code, these college savings programs are sponsored by states and educational institutions.
There are many reasons why to save for your child’s future higher education in a 529 plan. Let’s start with the tax benefits.
All earnings in a 529 plan are tax-free, so all investment growth is yours to cover college costs.
529 plan withdrawals to cover qualified higher education expenses are tax-free. These expenditures include tuition; room and board (on and off campus); mandatory fees; computer equipment and related technology like internet services; books, supplies and equipment; and certain expenses for students who have special needs.
Many state 529 programs offer state income tax deductions or credits to their residents who contribute to it.
529 plans are for everyone, no matter your income level. Most accounts can be opened with a $10-$25 contribution. Whether you save a little or a lot, every dollar saved today is a dollar that doesn’t have to be borrowed which makes a 529 college savings plan an excellent alternative to student loan debt.
What if I saved in my state’s 529 plan but my child goes to an out-of-state school?
A 529 account can be used at any federally accredited institution nationwide. That means that while you are saving in your state’s 529 plan, your child can choose to use those funds at an eligible 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 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, or any other post-secondary credential. That includes community colleges, vocational or trade schools, graduate schools, and even some study-abroad programs.
What if we’re expecting financial aid?
FAFSA is the form to fill out to receive federal financial aid. On it, 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. For lower-income families, this percentage rate could be lower. Therefore, a 529 plan has a minimal effect on receiving financial aid.
What if my child gets a scholarship?
Your 529 account is still an important component of your college savings strategy even if your child does earn a scholarship. Very few scholarships cover 100% of the costs. A 529 plan is perfect to pay for the other qualified expenses. You can also withdraw a matching amount to 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 your money in a 529 plan. There are no time limits in using a 529 plan, so hold on to it and let the tax-free earnings continue to grow. Maybe your child will change their mind. There’s also the option to transfer the funds to any member of the family without any tax consequences. This also includes you if you want to further your own higher education. You can also withdraw all the 529 funds. There will be a 10 percent federal tax penalty as well as taxes assessed on the earnings portion only of the withdrawal plus possible tax addback in the state where you reside and pay taxes.
By investing in your child’s future in a 529 plan, you’ll discover it’s far cheaper to save for your child’s higher education now and earn tax-free interest in a 529 account than to pay off student loans that grows with accumulated interest later. With all the benefits offered in a 529, your account can grow to reach your college savings goals.
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 more than 640,000 accounts with $11.9 billion in assets. Visit CollegeAdvantage.com or call 1-800-AFFORD-IT (233-6734) for more information.