Tim Gorrell, Executive director of Ohio Tuition Trust Authority
April 17, 2018
After working on your federal tax form, did you happily discover that you would receive a tax refund? What are you thinking of doing with this windfall? Here is one idea: Use all or part of your federal tax refund to start or enhance your 529 college savings account. It’s a smart and easy saving strategy.
The average 2016 federal tax refund was nearly $3,000. If you haven’t started a 529 plan, your refund would make a great first contribution. Why? One of the most effective tools to build a college savings account is compound interest, which is interest earned on contributions, earnings, and interest. To determine if you are on the right path to reach your college savings goal, use the savings goal calculator from Investor.gov and crunch the numbers yourself. Enter your initial investment, how long you have to save, as well as an estimated annual interest rate. Then select the calculate button and see how much the original contribution could grow with compound interest.
If you need help setting a college savings goal, use the college cost calculator from the College Savings Plans Network (CSPN) to receive an estimate on what a higher education could cost by the time your child needs to use the 529 funds.
Furthermore, if you choose to fund a 529 college savings plan with your tax refund, there are many tax benefits for doing so.
First, all earnings in a 529 plan are tax-free, so all investment growth is yours to spend on higher education costs.
Second, 529 plan withdrawals to pay for qualified higher education expenses are tax-free at federally accredited programs. These expenditures include tuition; room and board (on and off campus) 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.
Third, some states offer tax credits or deductions from taxable state income to in-state residents who contribute to the state’s 529 plans. To see if your state does offer this additional tax benefit, visit My State’s 529 Plan by CSPN.
Open a 529 account with your tax refund today for your children’s future higher education costs. An investment in a 529 plan is an investment in your child. 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. After all, every amount contributed, whether big or small, can help you reach your college savings goal.
About the Author
Tim Gorrell is the executive director of Ohio Tuition Trust Authority. For more than 25 years, Ohio Tuition Trust Authority has sponsored and administered CollegeAdvantage, Ohio’s 529 College Savings Program. CollegeAdvantage oversees more than 636,000 accounts and over $11.3 billion in assets. Visit CollegeAdvantage.com or call 1-800-AFFORD-IT (233-6734) for more information.