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April is designated Financial Literacy Month. When you’re thinking of saving for your children’s future higher education costs, there’s a lot of information to sort through. To help, Ohio’s 529 Plan, CollegeAdvantage, answers the most frequently asked questions about these tax-advantaged college savings programs.
529 plans can be used nationwide
Just because you are placing your college savings in Ohio’s 529 Plan, CollegeAdvantage, that doesn’t mean your child must attend a post-secondary school in Ohio. The funds in your 529 account can be used at any federally accredited institution nationwide. 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.
529 plans are not just for four-year programs
529 plans are created to be used at any federally accredited educational institutions – whether for a two-year, four-year, graduate or professional degree, or any other post-secondary credential. This list includes community colleges, vocational or trade schools, graduate schools, and even some study-abroad programs.
529 minimally affects financial aid
When filling in FAFSA, the 529 account is considered an asset. When owned by a parent, the funds in a 529 plan are only assessed at a maximum of 5.64% of its value. For lower-income families, this percentage rate could be lower.
Federal student aid is available in a variety of forms. Need-based federal financial aid is typically offered in the form of grants, loans or work-study. With Pell Grants, this aid given to a student will not have to be repaid. Federally subsidized student loans and parental loans must be repaid after college with interest by either the student or you. Work-study programs allow enrolled students to work part-time to earn money for some college costs. Make sure you understand what type of aid is being offered to see whether or not you will have to repay it with accrued interest.
Another reason to fill out FAFSA: Other organizations — like states, universities, colleges, and private organizations — also use it to determine what institutional scholarships or loans to offer to students interested in attending their school.
529 plans designed to work with scholarships
Your Ohio’s 529 Plan account is still an important component of your college-saving strategy even if your child does earn a scholarship. Very few scholarships cover 100% of the costs; for instance, a scholarship may only cover the cost of tuition. A 529 plan is perfect for filling any gaps with other qualified expenses such as: room and board during any academic period the beneficiary is enrolled at least half-time; mandatory fees; computer equipment and related technology and services; books; supplies; and equipment required for enrollment or attendance; and certain expenses for a special-needs student.
And if my child decides not to go to college?
You always have access to the money you have saved in a 529 plan. Hold onto to the account to see if your child rethinks the decision. There are no time limits for when a 529 account must be used. Let the 529 plan sit and watch the tax-free earnings continue to grow. If not, you can transfer the funds to any member of the family of your beneficiary, including yourself, without any tax consequences.
What are the tax benefits of 529 college savings plans
First, all earnings in a 529 plan are tax-free, so all investment growth is yours to spend on higher education costs. To see how tax-free growth can build your 529 account, use the tax benefit tool to see how the funds in a 529 grow compared to a taxable savings account.
Second, 529 plan withdrawals to pay for qualified higher education expenses are tax-free at federally accredited programs.
Third, Ohio offers deductions from taxable state income to in-state residents who contribute to the Ohio’s 529 Plan. Effective Jan. 1, 2018, Ohio’s state tax deduction was doubled to $4,000 per year, per beneficiary, with unlimited carry forward. Unlimited carry forward means that $4,000 is not an annual contribution cap. As an Ohioan, if you contribute more than $4,000 in one year, you can continue to subtract $4,000 per year, per beneficiary, from your State of Ohio taxable income until all the 529 contributions are deducted.
Open an Ohio 529 Plan today to start saving for your children’s future higher education costs. 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. If you need help determining how much to put aside each month to reach your college savings goal, fill in the College Savings Planner to receive personalized saving estimate. Please note that this is an example for illustrative purposes only. For additional advice, consult with your legal, financial, tax, or other advisor.
Ohio’s 529 Plan, CollegeAdvantage, is your plan, your way.
Posted on April 20, 2018