By Paul Paeglis
Executive Director, Ohio Tuition Trust Authority
March 31, 2014

Blog 74 Tax Refund

According to a recent survey by the financial services firm Edward Jones, only 8% of respondents said they planned to invest their tax refunds.  With the average refund exceeding $3,000, it may be tempting to spend it, however, you can make a significant impact on your college savings by saving some, or all, of your refund in a 529 college savings account for your children.

If you are already a college saver, consider contributing your tax refund into your existing 529 account.  If you haven’t started saving for college yet, using your tax refund is an easy way to open a 529 savings account for your child, grandchild, or other loved one.

Here are a few reasons why putting your refund into a 529 college savings account is the best option:

  1. Tax-free growth is one of the main features of 529 college savings plans.  The more you contribute and the sooner you do so, the greater opportunity your funds have to earn more and to grow.  When it’s time for college, as long as you use your funds for qualified higher education expenses, the earnings are not subject to income taxes.  This benefit alone makes choosing a 529 plan over a traditional savings or investment offering a smart decision for your family.  More than any other form of savings or investment, a 529 college savings account is the best way to set significant money aside to help cover your children’s educational expenses.
  2. The cost of a college education continues to rise.  Starting early and contributing frequently to your 529 college savings account is the best way to reach your college savings goals.  Using your tax refund helps you get there even quicker.  When setting your college savings goals, be sure to consider your risk tolerance preferences and savings time horizon before selecting your investment fund options. If you have a tolerance for risk and a longer lead time, check the fund performance of your investment options and look for high performing funds with the greatest potential for earnings.  Either way, risk tolerant or conservative, your tax refund can help grow your savings.
  3. Many states offer taxpayers a state tax benefit for contributing to their home state’s 529 plan.  Tax deductions and tax credits are advantages for contributing to your own state’s 529 plan.  Depending on your tax bracket, the benefit can amount to significant savings that you can reinvest in your 529 accounts, along with your tax refund.  Doing both benefits you even more.  Before opening a 529 account, be sure you look into the benefits your state offers for investing in its plan.  You can use the College Savings Plans Network site to see what your home state offers.

While the earnings potential of your additional lump-sum contribution is an important factor in increasing the size of your account, the most important thing is to seize this “extra money” opportunity to set aside more savings for college.  Even if you’re not expecting a refund, consider increasing your contributions by amount or frequency.  Most plans offer automatic, regular investments from your bank account and/or payroll deduction.  You’ll be adding to the balance of the accounts, increasing your earnings potential, giving your dollars more time to grow, and saving yourself money on taxes.

About the author:
Paul Paeglis is the Executive Director of the Ohio Tuition Trust Authority (OTTA), and has more than 20 years of experience in the banking and financial services industry.  In addition to his role at OTTA, Paul serves on the Executive Board of the College Savings Plans Network (CSPN).  As of December 31, 2013, CollegeAdvantage, Ohio’s 529 Plan, serves a total of more than 635,000 accounts with assets under management exceeding $8.5 billion.