By Trisha Good, Interim Executive Director, Ohio Tuition Trust Authority
May 29 (5/29) is known as 529 Day to highlight its importance in helping families achieve their higher education savings goals. To learn about 529s, here’s a true-or-false quiz to learn more about these tax-free savings plans.
1. 529 plans are only for four-year colleges. FALSE
There are many ways, and places, your 529 plan can be used after your child graduates high schools. If the school has a Federal School Code, then your 529 plan can be used there. This list includes four-year colleges and universities, two-year community colleges, trade or vocational schools, graduate schools, apprenticeships, and certificate programs nationwide.
2. Saving in a 529 plan is tax-free. TRUE
There are many tax benefits for saving in a 529 plan.
First, all earnings are tax-free, so every dollar saved and every dollar earned through interest is yours to cover college costs.
Second, withdrawals for qualified higher education expenses are also tax-free.
Third, many 529 programs offer either state income tax deduction and credits to residents who save with their home state’s 529 program. College Savings Plan Network (CSPN) is a great resource to learn more about your home state’s 529 higher education savings program
3. You’re limited on what a 529 will pay. FALSE
Your 529 account is quite flexible in what qualified higher education expenses it can cover. The list includes:
- Room and board, including off-campus residency (whether a rental or a Greek-affiliated residence) and groceries (non-taxable items only), provided these costs are equal or less than the school’s room and board allowances.
- Mandatory fees.
- Computer equipment and related technology as well as internet services.
- Books, supplies, and equipment related to enrollment and class schedule.
- Apprenticeship costs like fees, textbooks, supplies, and equipment, including required trade tools. The apprenticeship must be registered with the U.S. Department of Labor.
- Any student loan that qualifies for federal student loan income tax. There is a $10,000 lifetime limit per 529 beneficiary. An additional $10,000 can be used to repay qualified student loans for the beneficiary’s siblings.
- Some states allow 529 accounts to be used for K-12 tuition up to $10,000 per student, per year, for enrollment at public, private, or religious elementary or secondary school.
4. If my child doesn’t go to college, I will lose the savings in my 529. FALSE
You always have access to the funds saved in your 529 account, and you always have options on how to use them.
First, there is no deadline for when you must use a 529 plan. Therefore, you can wait to see what decision your child makes about their education after high school.
Second, you can also transfer the 529 account to any member of the family—anyone who is related by blood, marriage, or adoption. Therefore, the money you set aside for your child’s higher education can be transferred to a sibling, a cousin, grandchildren, or even yourself.
Third, starting in 2024, 529 funds can be rolled over to a Roth IRA for the same beneficiary to jump-start their retirement savings. There are still many clarifications and operational issues to be resolved relating to this change; additional information will be provided once available.
Lastly, you can always take a non-qualified withdrawal, if necessary. The earnings portion of the withdrawal will be taxed at the federal, state, and local level. In addition, there will be a 10% federal tax penalty assessed. Before making a non-qualified withdrawal, talk with a financial advisor or tax consultant to evaluate your options.
5. Will a 529 account be counted as an asset on FAFSA? TRUE, but minimally
When applying for financial aid, any assets can affect your financial aid eligibility. As a parent, if you own a 529 account for your child, the funds will only be included up to the maximum amount of 5.64% in the Expected Family Contribution (EFC) on the Free Application for Federal Student Aid (FAFSA). For example, if a parent has $10,000 saved in a 529 plan, only $564 of it will count on the FAFSA.
An investment in a 529 plan is an investment in your child. To learn more about 529 higher education saving plans, please visit CSPN.
About the author:
Trisha Good is the interim executive director of Ohio Tuition Trust Authority. For more than 33 years, Ohio Tuition Trust Authority has sponsored and administered Ohio’s 529 College Savings Program, CollegeAdvantage. Ohio’s 529 Plan oversees more than 680,000 accounts and over $15 billion in assets as of March 31, 2023. Visit CollegeAdvantage.com or call 1-800-AFFORD-IT (233-6734) for more information.